Bloomberg News

Peru Holds Rate at 4.25 Percent as Inflation Slows to Target

December 06, 2012

Peru’s central bank kept borrowing costs unchanged for a 19th consecutive month as inflation and credit growth ease in South America’s fastest growing economy.

The five-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of 12 economists surveyed by Bloomberg.

The central bank increased lenders’ reserve requirements three times since September to restrain credit growth and stem a rally in the sol, which rose to a 15-year high this week. Inflation last month slowed to the central bank’s target range of 1 percent to 3 percent the first time since mid-2011, giving policy makers leeway to gauge the effect of Europe’s debt crisis on investment and exports, said Cesar Penaranda, the head of economics at the Lima Chamber of Commerce.

“The outlook for next year is very similar to this year so there’s no need to change monetary policy,” said Penaranda, who’s also a vice president at Banco de Comercio, in a phone interview from Lima. “It’s not clear where the European situation is headed.”

Concern that the global economic outlook could deteriorate has led policy makers to keep rates unchanged for the longest period since Peru’s central bank began targeting inflation in 2002.

The central bank said today’s decision reflects “economic growth close to its potential and a still highly uncertain external backdrop,” according to a statement posted on its website. Inflation will continue to slow as supply of some perishable foods improves, the bank said.

Credit, Investment

The monetary authority increased the average reserve requirement for sol and dollar deposits by 0.75 percentage point on Oct. 30, the largest of the four increases this year.

The annual pace of bank lending slowed to 16.4 percent in October after reaching a six-month high in September on surging demand for car loans and mortgages, the central bank said Nov. 26.

The banking regulator last month told lenders to set aside more funds against potential losses on mortgages and car loans after delinquency rates rose to a two-year high of 1.79 percent in October.

The sol’s appreciation has increased the appeal of dollar- denominated credit, which accounts for 43.6 percent of all lending in Peru.

Private investment in roads, plant expansions, industry, infrastructure and house purchases will fuel bank lending growth of as much as 18 percent next year, said Walter Bayly, chief executive officer at Banco de Credito del Peru (CREDITC1), the country’s biggest bank, in a Nov. 13 interview.

Growth

Gross domestic product expanded 6.5 percent in the third quarter from a year earlier, the fastest pace among Latin America’s seven biggest economies, as infrastructure and mining projects spur construction activity.

Mining investment next year will increase to as much as $10 billion from about $7 billion this year, Mining Minister Jorge Merino told Congress Nov. 29.

Copper, Peru’s top export, has gained 6.1 percent this year to $3.6385 a pound on the Comex in New York.

Total exports dropped 3.9 percent in October from a year earlier, and are down 3.6 percent in the first 10 months of 2012, the Trade Ministry said Dec. 3.

‘Inflation Pressure’

The annual inflation rate fell to 2.66 percent in November from 3.25 percent the previous month and was the lowest among Latin America’s seven largest economies. Velarde yesterday said inflation will slow to 2 percent in 2013 from 2.8 percent this year.

The yield on Peru’s benchmark 7.84 percent sol-denominated bond due August 2020 has fallen 1.83 percentage point to 3.92 percent this year.

The sol traded at 2.5749 per U.S. dollar today, its strongest level since 1996. The currency has gained 4.3 percent in 2012, the tenth-best performance against the dollar among 31 emerging market currencies tracked by Bloomberg worldwide.

The central bank will likely raise its benchmark rate as stronger global economy causes inflation to accelerate next year, said Nader Nazmi, an economist at BNP Paribas.

“With the economy growing so rapidly, you may get some inflation pressure building up,” Nazmi said in a phone interview from New York. “All you really need is some stabilization in the global economy and demand for Peru’s exports, and that’s likely to happen next year.”

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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