Bloomberg News

Peru Likely to Keep 4.25% Rate as Greece, Protests Threaten GDP

June 07, 2012

Peru’s central bank will probably keep borrowing costs unchanged for a 13th month today as Europe’s financial crisis and protests against mining companies threaten to derail a rebound in investment.

The central bank will maintain the overnight rate at 4.25 percent, according to all 18 economists surveyed by Bloomberg. The seven-member board, led by bank President Julio Velarde, will announce its decision at about 6 p.m. in Lima.

Growth of South America’s sixth-largest economy accelerated in the first quarter for the first time since 2010 as investor confidence fueled a rebound in construction. Though rising demand may fuel inflation that’s been above target for 11 months, policy makers are more concerned about the effects of a global slowdown, said Siobhan Morden, head of Latin America fixed income strategy at Jefferies & Co Inc.

“Any central bank in the region is going to be sidelined until we get clarity on Europe in the next couple of weeks,” Morden said by phone from New York. “This isn’t the policy meeting to respond to domestic demand.”

The price of copper, Peru’s top export, has dropped 20 percent in the last year as Europe’s recession damps growth in China, the biggest consumer of industrial metals, and amid concern the U.S. recovery is faltering.

Peru’s exports fell 12 percent in April from a year earlier to $3 billion, a one-year low, on declines in copper, zinc and fishmeal prices, the Trade Ministry said June 5.

‘Great Uncertainty’

“There’s great uncertainty about what will happen to external demand and how it will hit economic activity,” Velarde said May 29. “We’re probably less optimistic than we would have been six weeks ago” about growth exceeding the central bank’s 5.7 percent forecast for this year, he said.

Increased social unrest has also clouded the outlook for the $176 billion economy, he said.

The government declared a state of emergency last week in the southern Andean province of Espinar after at least two people died in protests against an Xstrata Plc (XTA) copper mine that community leaders say is polluting water supply. Local residents are also demanding a bigger share of profits.

Newmont Mining Corp.’s (NEM:US) $4.8 billion Minas Conga gold project was suspended in November after street protests against what would be Peru’s biggest-ever investment. The protesters resumed demonstrations on May 31.

About $50 billion of mining investment is on stand-by because of the unrest, Finance Minister Miguel Castilla told state television June 4. The industry accounts for about 20 percent of fiscal revenue and 60 percent of exports. The investments are needed to fuel 6 percent growth this year and halt a decline in the country’s mining production, he said.

Infrastructure Spending

Gross domestic product rose 6 percent in first three months of this year as private investment climbed at the fastest pace in three quarters and the government stepped up infrastructure spending.

Government tax revenue rose an annual 8.9 percent last month, the most since February, while demand for consumer goods fueled a 9.4 percent increase in imports, the tax and customs duty collection agency said June 4.

The central bank raised reserve requirements for the first time in a year on May 1, citing concern foreign inflows risk fueling demand for dollar-denominated loans and stirring inflation pressures.

Annual growth in bank lending slowed to 16 percent in April from 18 percent in March as demand for dollar loans eased, the central bank said last week.

Consumer prices rose 0.04 percent in May, the slowest pace in four months, after food and fuel costs fell. Prices rose 4.1 percent from a year earlier. The central bank targets annual inflation of 1 percent to 3 percent.

Easing Commodities

Easing oil and grain prices will allow inflation to converge to the target next year, said Felipe Hernandez, an economist at RBS Securities Inc. in Stamford, Connecticut.

“Peru may want to hike once or twice more just to bring neutral rates to a slightly higher level” should external risks subside, Morden said. “If there were an extreme shock from Europe, there would be case for easing instead of hiking.”

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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