Bloomberg News

Peru Keeps 4.25% Rate for Ninth Meeting on Fiscal Stimulus

February 09, 2012

(Updates with central bank comment in third paragraph.)

Feb. 9 (Bloomberg) -- Peruvian policy makers kept borrowing costs unchanged for a ninth month today as they weigh the success of fiscal stimulus in offsetting the effect of Europe’s debt crisis.

The seven-member board, led by bank President Julio Velarde, held the overnight rate at 4.25 percent, matching the forecasts of all 16 economists surveyed by Bloomberg. Today’s decision means policy makers have kept the rate unchanged for nine straight meetings, the longest such streak since 2007.

“This decision takes into account the slower growth being recorded by some spending components, international financial risks and the fact that quickening inflation has mainly reflected temporary supply factors,” policy makers said in their statement posted on the central bank’s website.

Growth in South America’s sixth-largest economy accelerated for the first time in four months in December as the government rolled out stimulus spending to counter waning global demand for its metal and manufacturing exports. Though inflation eased from a two year-high of 4.74 percent last month, the central bank won’t lower rates unless Europe’s debt turmoil intensifies, said Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal.

“The policy rate is going to be subject to a European crash before it moves, due to the upside of inflation,” Alvarez said in a phone interview from New York. “If there’s a disorderly default, they’ll go for a rate cut.”

Policy makers today also said that future rate decisions “will be subject to new information and its determinants.” They forecast that inflation will slow to 2 percent by year-end.

Public Works, Mining

Peru unveiled plans in November to spend as much as $3.5 billion to shore up domestic demand on concern recession in Europe could spread to China and the U.S., the Andean nation’s top trading partners.

The economy expanded faster than expected in December as the government pumped up investment in public works, Finance Minister Miguel Castilla said Feb. 7.

Castilla said the government may revise its forecast for 2011 economic growth, which will be reported Feb. 28, to about 7 percent from 6.8 percent.

Public investment jumped 39 percent to a record 500 million soles ($186 million) last month from a year earlier, according to the Finance Ministry. The government is targeting a 30 percent increase this year to compensate for slowing spending by companies.

Business Confidence

Though the global outlook has improved since the start of the year, anti-mining protests in Peru may deter investment and damp domestic demand, said Felipe Hernandez, an analyst at RBS Securities Inc. in Stamford, Connecticut.

Newmont Mining Corp suspended its $4.8 billion Minas Conga gold project in November after two weeks of protests that sometimes became violent. Opponents to what would be the country’s biggest-ever investment project resumed street protests Feb. 1.

Government officials have held talks with communities in three other mining regions in the past month to stem spreading unrest.

The government will ask companies including Hochschild Mining Plc and Hudbay Minerals Inc. to suspend mining operations in the southern Andes during a 30-day environmental review after villagers said mines are polluting the area, Cabinet Chief Oscar Valdes’s office said today.

‘Political Noise’

Though business sentiment has improved after President Ollanta Humala revamped his Cabinet in December to better deal with the protests, investor confidence won’t return to levels seen prior to his election in June so long as the Conga project remains on hold, said Hernandez.

Business confidence rose in January for the first time in three months, according to a central bank survey published Feb. 3.

A separate survey by the bank showed economists forecast that the economy will expand 5 percent this year, compared with 5.3 percent in the previous month’s survey. Inflation expectations for 2012 declined to 2.9 percent from 3 percent.

Consumer prices fell the most in 15 months in January as the cost of food and bus fares eased.

Annual inflation slowed to 4.23 percent from December, and will continue to decelerate this year, creating leeway for the central bank to ease its monetary policy stance to shore up demand, said Roberto Flores, the head of research at Inteligo SAB, a Lima-based brokerage.

The Peruvian sol has strengthened 0.4 percent since the end of December to 2.6865 per U.S. dollar today, according to Deutsche Bank AG’s local unit.

The yield on the nation’s benchmark 7.84 percent sol- denominated bond due August 2020 has fallen 12 basis points, or 0.12 percentage point, this year to 5.63 percent, according to prices compiled by Bloomberg.

“Deflation could mean the economy is being held back by political noise,” said Pedro Olaechea, president of the National Society of Industries, in a Feb. 7 interview in Lima. “We’re more worried by the political noise surrounding investment than we are by a default in Greece.”

--With assistance from Ainhoa Goyeneche in Washington. Editors: Robert Jameson, Richard Jarvie

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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