Peruvian central bank President Julio Velarde said the bank is ready to tighten monetary policy if it sees domestic demand fueling inflation.
The bank will raise either its benchmark interest rate or reserve requirements should demand pressures increase, Velarde told reporters in Lima today.
Banco Central de Reserva del Peru boosted reserve requirements for the first time in a year on May 1 as credit growth and an improved economic outlook risk fueling inflation that’s been above the target of 1 percent to 3 percent for 10 months. While annual growth accelerated to 6 percent in the first quarter from 5.5 percent in the previous three months, it remains below potential, Velarde said.
“Have no doubt that if we see inflation stemming from demand pressures, which we don’t yet, we will act to adjust monetary policy,” Velarde said. Raising interest rates or the reserve ratio “has the same effect,” he said.
The central bank raised its benchmark rate by 300 basis points in the 12 months through May 2011 as economic growth as high as 12 percent fueled overheating concern. It’s kept rates unchanged at its last 12 meetings after 2011 presidential elections triggered a slowdown in investment. The country’s potential growth rate is 6.4 percent, Velarde said.
Consumer prices rose 0.5 percent last month and climbed 4.1 percent from a year ago, the national statistics agency said May 1.
Yields on the nation’s benchmark 7.84 percent sol-denominated bond due August 2020 have climbed nine basis points, or 0.09 percentage point, to 5.22 percent since May 14 amid speculation the central bank will increase rates as inflation expectations rise above the target range.
The yield rose less than one basis point in trading today, according to prices compiled by Bloomberg.
Scotiabank Peru raised its 2012 forecast for annual inflation to 3.3 percent from 3 percent amid food and fuel price increases and rising wages, according to a May 14 report.
Velarde said inflation will return to the central bank’s target range. Increases in international grain prices may cause concern if they become a trend, he said.
Inflation has been caused by “temporary supply factors” that can’t be controlled using monetary policy, he said.
The Peruvian sol declined 0.1 percent to 2.6735 per U.S. dollar at today’s close, from 2.67 yesterday, according to Deutsche Bank AG’s local unit.
Velarde said the sol will probably remain volatile until after elections are held in Greece, and said the central bank will lend dollars to local banks if needed.
Investor “nervousness” has fueled demand for dollars and led the bank to issue dollar-denominated repurchase agreements for the first time ever last week in an attempt to ease the interbank lending rate for U.S currency, he said.
The sale of repos isn’t designed to affect the spot market, he said.
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