Bloomberg News

Peru Keeps 4.25% Rate for Eighth Month as Inflation Quickens

January 12, 2012

(Updates with central bank comment in third, seventh, 22nd paragraphs.)

Jan. 12 (Bloomberg) -- Peru’s central bank kept its benchmark interest rate unchanged for an eighth month as the highest inflation rate since 2009 prevents policy makers from doing more to shore up economic growth.

The seven-member board, led by bank President Julio Velarde, held the overnight rate at 4.25 percent, matching the expectations of all 13 economists surveyed by Bloomberg.

“This decision takes into account the slower growth being observed in some spending components, international financial risks and that the acceleration in inflation is principally due to temporary supply factors,” central bankers said in their statement.

Peru’s economy expanded at the slowest pace in 21 months in October as the European debt crisis weighed on commodity prices and worldwide demand. The central bank is likely to keep interest rates on hold as it waits to see if stagnation in Europe pulls growth in Peru’s commodity-dependent economy still lower, said Pedro Tuesta, an economist at 4Cast Inc.

“There’s no room to cut,” Tuesta said in a phone interview from Washington. “Food inflation may not start slowing until the third quarter.”

Reversion

The central bank last month repeated its view that 2012 economic growth and domestic demand will remain below potential while attributing the pace of inflation to “temporary supply factors.”

“Going forward, the supply shocks that affected inflation last year will continue to be reverted, which will help the inflation rate ease in the course of this year and converge to the target range,” policy makers said in their statement.

Gross domestic product will rise 5.5 percent in 2012, Velarde said Dec. 16, down from an estimate of 5.7 percent three months earlier, on slower exports and private investment.

GDP probably rose 6.8 percent in 2011, exceeding the economy’s potential growth rate of about 6.5 percent, he said.

Social unrest remains a threat to growth after protests led Newmont Mining Corp. to suspend its Minas Conga gold mine expansion in November, said Roberto Melzi, a strategist at Barclays Capital Inc.

“In a scenario in which you have three other Congas and private investment collapses or decelerates further, then you would see the central bank stepping in” and cutting rates this year, Melzi said in a phone interview from New York.

Trade, Metals

Peru posted its first trade deficit in 34 months in November on weaker global demand for its metals and energy exports.

The Andean country is the world’s third-largest exporter of copper and zinc, sixth in gold and a leading exporter of silver. Metals led by copper account for two thirds of its exports.

Copper prices fell 23 percent last year as Europe’s fiscal woes threatened global growth and demand waned in China, the world’s top metals buyer.

South America’s sixth-largest economy expanded 5.1 percent in October from a year earlier, the slowest pace since January 2010. The national statistics agency will disclose November’s growth rate Jan. 16.

Rate Horizon

Peru’s annual inflation rate rose to 4.74 percent in December as food prices increased on tighter domestic supply.

Inflation expectations for 2012 climbed for a third straight month in December to 3 percent, compared with 2.8 percent in November, according to a central bank survey published Jan. 9.

The central bank targets annual inflation of 1 percent to 3 percent.

Companies were less optimistic about the economy and domestic demand in December compared with November, the central bank survey showed. Consumer confidence jumped to a record.

The central bank’s monetary stance is neutral and what happens in the world economy will determine whether the next move is a rate increase or rate reduction, Velarde said at a Dec. 16 news conference.

The sol rose to 2.6910 per U.S. dollar Jan. 9, its strongest level since April 2008, as investors bet the economy will withstand the global slowdown.

“Indicators of global activity show slower growth for 2012 and uncertainty international financial markets persists,” policy makers said today in their statement.

“Future adjustments in the benchmark rate be data- dependent,” they said.

--With assistance from Ainhoa Goyeneche in Washington. Editors: Robert Jameson, Jonathan Roeder

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.


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