Bloomberg News

Peru Relaxes Funds’ Foreign Portfolio Limits to Tame Sol

February 08, 2013

Peru’s central bank relaxed the limit on local pension funds’ foreign holdings for a second time in a month to ease demand for soles after the currency rose to a 16- year high.

Policy makers meeting yesterday agreed to raise the ceiling on pension funds’ overseas investments to 34 percent of their portfolio from 32 percent, Adrian Armas, the bank’s research director, told reporters on a conference call today.

The Andean nation has stepped up efforts to tame the sol by increasing dollar purchases and raising reserve requirements. Finance Minister Miguel Castilla said last month the ministry will purchase $4 billion in the spot market to offset increased foreign inflows amid rising demand for the country’s bonds.

The Finance Ministry’s purchases “have only just started, so going forward we’ll see the impact,” Armas said.

The sol declined 0.1 percent to 2.5795 per U.S. dollar today, extending its decline over the last four weeks to 1.4 percent, according to prices compiled by Bloomberg. The sol touched 2.5390 on Jan. 14, its strongest level since October 1996.

Lowering the central bank’s benchmark rate would ease inflows “a little bit” by narrowing the differential between borrowing costs in Peru and developed markets, central bank President Julio Velarde said in a Jan. 30 interview. Still, foreign direct investment and long-term dollar loans are the main sources of inflows, he said.

The central bank may consider cutting its benchmark lending rate if inflation conditions allow, Armas said today.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net


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