Bloomberg News

Velarde Says Peru Rates Neutral as Economic Growth Picks Up

April 17, 2012

Peru’s central bank President Julio Velarde said the country’s benchmark interest rate is in line with a neutral monetary policy stance as faster growth is having little impact on inflation.

The bank’s rate is “very close to neutral,” Velarde said today in an interview in London. “We don’t see demand pressures on inflation.”

Economic expansion will accelerate in the second half of the year from the first six months, Velarde said, after growth reached a six-month high in February. Business sentiment, which climbed to a one-year high in February, according to the bank, will remain “on the optimistic side,” he said.

The central bank kept its key interest rate at 4.25 percent on April 12 citing indicators showing that economic growth has stabilized after easing to a two-year low in the fourth quarter.

Gross domestic product probably expanded at an annual rate of 5.5 percent to 6 percent in the first quarter after a boom in construction and imports of capital goods led to higher-than- expected growth of 7.2 percent in February, Finance Minister Miguel Castilla said in an interview today in London. Economic expansion in March may be “a little bit below 7 percent,” Castilla said.

The government may wait until next year to sell bonds to finance the 2013 budget, after covering this year’s needs with a $1.1 billion overseas issue Jan. 25, Castilla said. For this year the government will prioritize local issues of short- duration securities, such as Treasury bills, he said.

‘Strong Tremors’

The Peruvian sol was little changed at 2.6565 per U.S. dollar at today’s close, from 2.6560 yesterday, according to Deutsche Bank AG’s local unit.

The yield on the nation’s benchmark 7.84 percent sol- denominated bond due August 2020 fell four basis points, or 0.04 percentage point, to 5.32 percent, according to prices compiled by Bloomberg.

Europe’s sovereign debt crisis still represents a potential threat to Peru’s economy, Velarde said.

“We’ll probably have some strong tremors for the rest of the year from Europe and of course you have the problem of the Middle East and in connection with that the price of oil,” he said.

The Andean nation’s annual inflation rate will slow to between 2.4 percent and 2.6 percent this year from 4.7 percent in 2011, Velarde told reporters in London yesterday. The central bank targets inflation in a range of 1 percent to 3 percent.

Wage Growth

The risks to global demand posed by Europe’s sovereign debt turmoil may persuade Peru’s central bank to keep rates on hold through 2014, said Pedro Tuesta, a senior Latin America economist at 4Cast Inc. Still, policy makers will have to act if local demand pressures build amid a “huge” growth in wages, he said.

In Lima, average monthly pay rose 13 percent to 1,324 soles ($498) in March from the same month a year earlier while the unemployment rate fell to 8.7 percent from 9.4 percent, the national statistics agency said yesterday.

“Domestic demand is outpacing economic growth, even with manufacturing growing at low rates because of weaker exports,” Tuesta said in a phone interview from Washington. “That’s why inflation is going to be much more stubborn than the central bank believes.”

To contact the reporters on this story: Karen Eeuwens in London at keeuwens@bloomberg.net; 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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