Julio Velarde
Peru’s policy makers yesterday kept their benchmark interest rate at a two-year high as above-target inflation outweighs concern about slowing global demand.
The central bank’s seven-member board, led by bank President Julio Velarde, left the overnight rate unchanged at 4.25 percent, matching the forecasts of all 16 economists surveyed by Bloomberg.
“There continues to be a heightened uncertainty in international financial markets and the potential negative impact on global growth,” policy makers said in their statement posted on the central bank’s website.
The threat of stagnation in Europe and the U.S. has dimmed the outlook for Peru’s commodity-dependent economy and led the government to announce what it has called “preventive” stimulus measures. At the same time, while prices rose more- than-expected last month, inflation expectations remain within the central bank’s target range, which gives policy makers room to room to maneuver, Eduardo Cavallo, Latin America vice president at Goldman Sachs Group Inc. in New York, wrote in a research note after the decision.
“The bank maintained the conditional easing bias going forward which shows that despite the still robust performance of the Peruvian economy, the bank is concerned about the potential spillovers of the global backdrop on Peru,” Cavallo wrote.
After holding the rate steady for a fifth straight month at the Oct. 6 meeting, policy makers highlighted areas of the $153 billion economy that had begun to slow.
Government Steps
Prices for copper, Peru’s top export, have fallen 23 percent since July on concern that Europe’s sovereign-debt crisis may lead to a global recession.
An uncertain global outlook has damped domestic investment and may lead Peru to grow below potential in the fourth quarter, Velarde said today in an interview in Santiago.
“Consumption continues to be strong but investment isn’t showing the same vigor as before because of international fears,” he said. “If the problems are overcome, there could be a major bounce in confidence and commodity prices. That can’t be ruled out, although everyone is pessimistic now.”
There are no inflationary pressures at the moment, Velarde said.
The sol strengthened 0.2 percent 2.7025 per U.S. dollar at 11:06 a.m. in Lima, from 2.7075 yesterday.
Stimulus Measures
The government is spending over the next six months the equivalent of 1 percent of gross domestic product on stimulus measures that focus on infrastructure projects.
“As the Euro zone struggles to resolve its debt issues and uncertainty about contagion remains, we expect the bank to keep its benchmark rate at 4.25 percent in its next meeting,” Roberto Flores, head of research at Inteligo SAB, a Lima-based brokerage, wrote in a research note e-mailed to investors.
The government is tapping a wider-than-expected budget surplus to finance a stimulus plan aimed at safeguarding Peru’s commodity-dependent economy from global market turmoil.
Though a “sizeable” budget surplus makes President Ollanta Humala’s stimulus package feasible, in a context of faster-than-expected growth, the move “can also be read as reflecting a higher marginal propensity to spend and a lower weight on inflation objectives on the part of the Humala administration,” said Bank of America in a Oct. 26 report.
‘Transitory’ Factors
Rising domestic food and clothing costs pushed the annual inflation rate to 4.2 percent in October, a 29-month high and above the central bank’s target range of 1 percent to 3 percent.
On the month, prices rose 0.31 percent, higher than the 0.2 median estimate of analysts in a Bloomberg survey. October’s inflation rate was affected by “transitory supply factors,” policy makers said yesterday.
Though international grain and crude oil prices are mainly to blame for higher inflation, pressures stemming from domestic demand are intensifying, said Mario Guerrero, an economist at Scotiabank Peru.
Velarde had said Sept. 16 that monthly inflation would be less than 0.2 percent in the months ahead and forecast periods of deflation as global commodity prices eased.
Economists expect inflation will be 4 percent this year, according to the latest central bank survey, up from a forecast of 3.5 percent a month earlier. The analysts expect the economy to expand 6.5 percent this year, before slowing to 5.5 percent growth in 2012.
Peru’s gross domestic product rose 8.8 percent in 2010, which ranks as the country’s third-fastest annual growth rate in 16 years.
Inflation Outlook
Economists in the central bank’s survey see inflation slowing to 2.6 percent in 2012 and 2.5 percent in 2013, prompting the central bank’s monetary policy manager, Jorge Estrella, to say Nov. 9 that inflation expectations remain “anchored” in policy makers’ target range.
Growth has rebounded along with consumer and business confidence following the country’s June 5 presidential election. Peru’s stock index, bonds and sol had declined ahead of the election on concern that a Humala government might boost state control of the economy, raise mining royalties and deter investment.
The economy expanded 7.5 percent in August from a year earlier, after rising 6.5 percent in July and 5.3 percent in June.
If Europe contains its debt crisis and domestic inflation pressures don’t ease as quickly as the central bank anticipates, rate increases are possible next year, according to Scotiabank and Barclays Capital Inc.
Peru’s sol rose to its highest level in more than three years Nov. 7 as rising prices and quickening growth reduces the possibility of the central bank lowering rates, said Gonzalo Navarro, head trader at Banco Santander in Lima.
“If the crisis dissipates, the pressure will be for the bank to raise rates,” Navarro said.
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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