Bloomberg News

Peru Keeps 4.25% Rate for Tenth Month Amid Government Stimulus

March 09, 2012

Peru’s central bank kept its benchmark interest rate unchanged yesterday for a 10th month as the government steps up spending to counter Europe’s debt crisis and anti-mining protests slow investment in the third-largest copper-producing nation.

The seven-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of all 15 economists surveyed by Bloomberg.

“Some leading and coincident activity indicators show growth is moderating,” the central bank said in a statement posted on its website. “On the other hand, the trend in global economic indicators has been somewhat better than expected.”

South America’s sixth-largest economy expanded 5.5 percent in the fourth quarter, the slowest annual pace in two years, as demand for its metal and manufacturing exports waned in Europe and the U.S. Increased infrastructure spending under the government’s $3.5 billion stimulus package will help stave off a rate cut while inflation remains above-target, said Carola Sandy, an economist at Credit Suisse AG.

“The central bank won’t be willing to cut unless they see a huge deterioration in one of the economic indicators,” Sandy said in a phone interview from New York. “They don’t know enough yet to change their stance.”

Growth, Convergence

After last month’s policy meeting the bank’s statement pointed to signs domestic growth continued to ease in January.

Peru’s annual inflation rate will slow to 2 percent this year, after reaching a two year-high of 4.74 percent in December, the central bank said in the Feb. 9 communiqué.

Consumer prices rose 0.32 percent in February, the fastest in three months, as vegetable prices climbed after flooding damaged crops and blocked roads, the statistics agency said March 1. The annual rate fell to 4.17 percent from 4.23 percent in January.

“Although increases are being observed in international fuel prices, the annual inflation rate is expected to converge to the target range around the middle of this year,” policy makers said yesterday.

A slowdown in private investment offset rising household demand and a pick-up in government outlays in the fourth quarter, the central bank said in a Feb. 24 report.

Investor concern that anti-mining protests in Peru will spread after demonstrations stalled Newmont Mining Corp. (NEM)’s gold project is holding back private investment, Sandy said.

Minas Conga

Newmont halted construction work in November at its Minas Conga project in the northern Andes following protests by local communities concerned the gold mine will deplete water supplies.

Political opposition to the $4.8 billion project is being led by the head of the regional government, Gregorio Santos, who plans further protests while government-appointed consultants carry out a 40-day environmental review of what would be Peru’s biggest ever investment.

The outlook for investment will deteriorate if work on Conga doesn’t resume, Moody’s Investors Service said in a March 5 report.

The mining industry will account for more than half the $34 billion of private investment expected in Peru this year and next, according to the central bank.

Slower annual inflation raises the possibility of a cut in the benchmark rate or reserve requirements in the first half of this year to prop up demand, said Roberto Flores, head of research at Inteligo SAB, a Lima-based brokerage.

Energy, Food

Any easing in food costs in the second quarter will likely be offset by rising crude oil prices, limiting the central bank’s room to maneuver, according to Enrique Alvarez, head of fixed-income research at IdeaGlobal.

The Peruvian sol has gained 1 percent versus the dollar this year while the yield on the nation’s benchmark 7.84 percent sol-denominated bond due August 2020 has fallen 30 basis points, or 0.30 percentage point, to 5.45 percent on optimism European policy makers have contained the region’s debt crisis and as the outlook for U.S. growth improves.

Peruvian growth will probably accelerate on rising fiscal spending, a likely rebound in private investment and a pick-up in global demand, raising the prospect of rate increases in the second half of this year, said Nader Nazmi, senior Latin America economist at BNP Paribas.

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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