Peru’s central bank kept its benchmark lending rate unchanged for a fourth month amid a global slowdown and indicated a readiness to cut borrowing costs at future meetings to protect the country’s economy.
The seven-member board, led by central bank President Julio Velarde, held the overnight rate at 4.25 percent, matching the estimates of all 15 economists surveyed by Bloomberg.
“This decision reflects the deceleration in economic activity and heightening of international financial risks,” policy makers said in their statement posted on the bank’s website. “The central bank will modify monetary policy if these trends continue.”
Europe’s debt crisis and stagnation in the U.S., the world’s largest economy, may undermine Peru’s commodity- dependent growth, policy makers said when they left rates unchanged at their last meeting on Aug. 11. Colombia, Chile and Mexico have also halted rate increases in the past few months, while Banco Central do Brasil cut its key rate for the first time in more than two years.
“Growth is going to be slightly below potential given the global context so you won’t have the pressure from domestic demand,” said Alonso Segura, head of investment and strategy at Banco de Credito del Peru, in a phone interview from Lima. “It’s premature to cut rates now but going forward the trend will be downward.”
‘Gradual Process’
The central bank expects Latin America’s sixth-biggest economy to expand 6.3 percent in 2011, and 6 percent in 2012, down from previous forecasts of 6.5 percent for both years, Velarde told congress on Sept. 6. Over the past five years, Peruvian growth averaged 7.2 percent.
A 35 percent surge in imports that increased company inventories in the first half of the year masked a slowdown in investment sparked by concern President Ollanta Humala, who took office July 28, would reverse policies that made Peru the region’s fastest growing economy in the past decade.
The $153 billion economy expanded 6.6 percent in the second quarter, the slowest pace in more than a year, as construction output stalled and manufacturing growth weakened.
Business sentiment is improving after Humala appointed a business-friendly Cabinet and struck a deal with mining companies on increasing royalties.
“The uncertainty is clearing, but it’s a gradual process,” said Segura. “In the fourth quarter, we’ll see a more significant recovery in confidence and investment.”
‘Can Act Quickly’
Electricity demand grew at the fastest pace in six months in August, while retail sales also signal domestic activity is “vigorous,” Velarde said.
The sol gained 0.1 percent to 2.7247 per dollar today to boost its gain since April 29 to 3.7 percent, the best performance among 25 emerging market currencies tracked by Bloomberg.
Though the central bank is focused on reining in inflation, which is running at a two-year high of 3.35 percent, policy makers stand ready to adjust rate policy if the global economy deteriorates, Velarde said.
“We have an array of munitions on the monetary and fiscal side and can act quickly if the more negative scenario materializes,” Velarde said. “We can cut interest rates, lower reserve requirements, and inject liquidity.”
Policy makers are concerned slower global growth may exacerbate a deceleration in private investment that banks including Barclays Capital Inc. expect to become more apparent in the third quarter of this year.
‘Context’ of Growth
The government has drafted what Finance Minister Miguel Castilla on Sept. 1 called “conservative” 2012 spending plans in case metal prices drop, and is ready shore up demand if a slowdown threatens metal exports and a projected $73 billion of private investment over the next five years.
Slower activity and declining international food and energy prices will keep monthly inflation around the central bank’s target of 0.2 percent for the rest of the year, said Isaac Foinquinos, an economist at BBVA Banco Continental, in a Sept. 1 note to investors.
“The board will monitor the outlook for inflation and its internal and external determinants and make adjustments to monetary policy instruments in order to guarantee inflation converges to the target range in a context of economic growth,” policy makers said in their statement today.
‘Scope’ to Cut
Consumer prices rose 0.27 percent in August on a monthly basis, after jumping 0.79 percent in July. Annual inflation will probably end 2011 at 4 percent, BNP Paribas analysts including Italo Lombardi wrote in a Sept. 2 report.
The central bank targets inflation of 1 percent to 3 percent.
The global slowdown led Brazil’s central bank to unexpectedly cut its benchmark rate last week even as inflation runs above target. The reduction marked the start of monetary easing in the region, according to Bank of America.
With the exception of Colombia, Latin America’s central banks will “move swiftly and cut policy rates much sooner” than their Asian counterparts, the bank said in a Sept. 1 report. Peru’s central bank will reduce its key rate by 25 basis points by the end of next year, Bank of America said.
“A rate cut is likely in the next six months because of the external uncertainty and given business confidence is still recovering from the elections,” said Segura. “There’s scope for a cut to 4 percent, but not just yet.”
Bloomberg - John Quigley
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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