Bloomberg News

Peru Keeps 4.25% Rate as Stabilized GDP Anchors CPI Outlook

April 13, 2012

Peruvian policy makers kept borrowing costs unchanged yesterday for an 11th month as the government’s fiscal stimulus and rising business confidence bolster the economic outlook.

The seven-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of all 10 economists surveyed by Bloomberg.

The decision to keep rates unchanged is due to the fact “the deviation in inflation has reflected temporary supply factors,” and “the pace of economic growth is close to potential,” the bank said in a statement posted on its website. “At the same time, inflation expectations for the year are anchored within the target range.”

South America’s sixth-largest economy will expand faster than expected this year as public investment soars and stronger U.S. growth boosts the outlook for exports in the third-biggest copper-producing nation, the bank said in a March 23 report.

“Activity indicators show economic growth has stabilized around a level that’s sustainable in the long term,” policy makers said in their statement.

Rate Horizon, Investment

The central bank will probably keep rates on hold for the rest of this year on concern that Europe’s debt crisis may choke the U.S. recovery, even as Peru’s inflation remains above target, said Hugo Perea, the chief economist at BBVA Banco Continental.

“There is support from private investment and public investment is better than expected,” Perea said by phone from Lima. “The Europe problem has been contained, but it’s still there.”

Peru’s government is implementing economic stimulus measures worth almost 2 percent of gross domestic product to offset slower global growth, Finance Minister Miguel Castilla said March 21.

President Ollanta Humala’s administration will also seek private investors to participate in $10.4 billion of infrastructure projects to be started this year and next, he said.

Public infrastructure spending, which shrank 18 percent in 2011, jumped a record 41 percent in the first quarter from a year earlier, the finance ministry said April 9.

Growth, Inflation

GDP may expand 6 percent this year if an increase in business sentiment to a one-year high in February leads to stronger private investment, Castilla told Congress April 10.

Cement demand rose almost 20 percent in March, indicating construction activity is recovering, he said.

Policy makers in their quarterly inflation report published March 23 increased their GDP forecast to 5.7 percent from 5.5 percent previously. GDP rose 6.9 percent in 2011.

The report also forecast a 2 percent to 3 percent increase in consumer prices this year before moderating to 1.5 percent to 2.5 percent in 2013.

The central bank, which targets annual inflation of 1 percent to 3 percent, had said Feb. 9 that the pace of price increases would ease to 2 percent in 2012.

In March, prices climbed 0.77 percent from February and 4.2 percent from than a year earlier on higher fuel and food prices, the national statistics agency said April 1.

Policy View, China

“The impact of rising international fuel prices and domestic supply shocks will be reversed “with greater intensity around the middle of the year,” policy makes said.

The yield on the country’s May 2015 sol-denominated bond has risen 22 basis points to 4.33 percent since central bank’s March 23 report prompted investors to rule out an expected cut in borrowing costs.

The Peruvian sol has gained 1.4 percent against the U.S. dollar this year. The currency strengthened 0.1 percent to 2.6590 at the close of trading yesterday, according to Deutsche Bank’s local unit.

Still, a slowdown in exports is a sign that slower Chinese growth could hurt Peru’s $176 billion economy, said Juan Varilias, president of exporter group Adex.

Copper, zinc and lead shipments fell in February amid concern demand may ease in China, Peru’s top export market, he said in an April 10 e-mailed statement. Metals account for about two-thirds of Peru’s exports.

Exports rose at an annual rate of 9.7 percent in February after surging 31 percent in January, the national statistics agency said April 10. Import growth almost halved to 12 percent from 22 percent.

“Lowering the rate now would be a very aggressive move by the bank given the pace of domestic demand,” said Benito Berber, a strategist at Nomura Securities Inc. in New York. “If we head into a phase with a much weaker global economy, then the central bank’s next move would be a cut.”

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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