Bloomberg News

Peru Keeps Key Rate at 4.25% on Forecast Growth Will Quicken (1)

June 13, 2013

Peru’s central bank kept borrowing costs unchanged for a 25th consecutive month on expectations the economy will rebound after growing at the slowest pace in more than three years in the first quarter.

The five-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecast of all 15 economists surveyed by Bloomberg.

The $199 billion economy expanded 4.8 percent in the first quarter from the year before, down from 5.9 percent in the fourth quarter, after metal and manufacturing exports plunged on weaker global demand. The economy is growing at a pace close to its potential and inflation will slow to the 2 percent mid-point of the target, the central bank said in a statement accompanying today’s decision.

“Activity indicators show growth of the Peruvian economy is close to its long-term sustainable level,” according to the statement. “Indicators tied to the external market still show a weak performance, affecting export volumes and prices.”

Domestic demand has prevented a sharper deceleration in the commodity-dependent economy, and will lead gross domestic product to rise 6.4 percent in the second quarter, Velarde told Congress on June 5.

Policy makers will keep rates on hold as they expect domestic demand to refuel growth in the second quarter, said Juan Pablo Fuentes, an economist at Moody’s Analytics Inc.

Nothing Major

“The current policy rate is appropriate, it’s enough to stimulate demand,” Fuentes said by phone from West Chester, Pennsylvania. “The economy is slowing but it’s nothing major, it’s only temporary so it’s better to keep the rate unchanged.”

Annual inflation has fluctuated between 2.3 percent and 2.6 percent for the past four months. Inflation will slow to the center of policy makers’ target range of 1 percent to 3 percent in “coming months,” according to the bank’s statement.

Economic activity probably expanded 7.1 percent in April, more than twice March’s 3 percent pace, according to the median estimate of 13 economists in a Bloomberg survey. The statistics agency will report April activity tomorrow.

“Construction, services and retail have been the main drivers of growth in recent quarters and that’s going to continue,” said Fuentes.

Slightly Expansive

After raising reserve requirements for soles five times since May 2012, the central bank reduced the ratio for some lenders this month by establishing a 20 percent ceiling. In a June 6 interview, Velarde said the move was “slightly expansive” and was prompted by concern that the economy was slowing.

The move followed a deceleration in credit growth and government measures to bolster flagging business sentiment.

Bank lending rose 14 percent in April, the slowest pace for at least two years, as demand for dollar loans eased, according to the central bank.

Jorge Pastrana, an economist at Citigroup Inc., wrote in a June 10 report that the slowdown may not be temporary and that the central bank will cut its key rate 50 basis points, or 0.5 percentage point, to 3.75 percent this year. The timing depends on when the slowdown “becomes evident,” he wrote.

Peru posted a $378 million trade deficit in April as metal exports declined, the national statistics agency said June 11. The median estimate of economists in a Bloomberg survey was for a deficit of $301 million. The central bank last week cut its forecast for 2013 trade surplus by 83 percent to $485 million.

Copper Prices

Copper prices are down 13 percent this year while gold has retreated 18 percent. The metals account for half Peru’s exports.

The Lima General stock index has plunged 22 percent this year in local currency terms, the steepest decline among 94 primary indexes tracked by Bloomberg.

The sol has dropped 6.6 percent against the dollar over the same period, while the yield on the country’s benchmark sol bond due 2020 rose to 5.26 percent on June 10, its highest in a year.

“Nervousness among foreign investors led to the correction in bonds and the currency, but there’s no fundamental change in the economy,” Diego Marrero, deputy head of investments at Credifondo, Peru’s largest mutual fund manager, said by phone from Lima. “Inflation is within the target range so that’s not a cause for concern. The bank will keep monitoring the data before making any decision to raise or cut.”

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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