Peru May Raise Rates as `Scorching' 8.8% Growth Boosts Inflation Outlook

Peru’s central bank may raise its benchmark lending rate today for a second straight month as 8.8 percent economic growth and inflation exceed economists’ estimates.

The seven-member board, led by President Julio Velarde, will probably increase its reference rate by a quarter point to 1.75 percent from 1.50 percent, according to 10 of 12 economists surveyed by Bloomberg. Two analysts expect the bank to pause. The board will announce its decision after 6 p.m. New York time.

Policy makers unexpectedly raised the benchmark rate by 25 basis points last month from a record low 1.25 percent, the first increase since September 2008, amid signs of faster business and household spending. The International Monetary Fund expects Peru’s economy to grow 6.3 percent this year, faster than all of its neighbours in Latin America and the Caribbean.

Velarde, speaking at the Bloomberg Peru Economic Summit yesterday in Lima, said the economy is growing with “lots of force” in the second quarter, though so far he sees no signs of demand-side pressures on inflation.

“There is a danger of overheating but we don’t see it yet,” Velarde, 57, said at the event in Lima. “If private spending starts to rise in an exaggerated way, obviously we’ll have to withdraw the monetary stimulus that we’ve had up to now.”

Photographer: Karel Navarro/Bloomberg

Peru's Central Bank president Julio Velarde. Close

Peru's Central Bank president Julio Velarde.

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Photographer: Karel Navarro/Bloomberg

Peru's Central Bank president Julio Velarde.

The bank will keep pushing the rate up at a steady pace in the months ahead as growth beats expectations and May’s inflation rate was higher than forecast, said David Beker, chief Latin American economist at Bank of America-Merrill Lynch.

“It makes sense to hike again now to send a consistent message to the market,” Beker said in a phone interview from New York.

Peru was the second Latin American country after Brazil to raise borrowing costs in 2010 as a recovery in private investment spurs domestic demand. Chile next week will increase its lending rate from the record low 0.5 percent in place since July, according to the central bank’s a bi-weekly survey of traders and investors.

Growth Perspectives

Peru’s “scorching” recovery prompted Morgan Stanley this week to increase its economic growth forecast to 7 percent this year from 4.9 percent. Finance Minister Mercedes Araoz said reports that the economy is overheating are “exaggerated” and that any new steps to cool growth are the responsibility of the central bank.

“An economy growing at 6 percent isn’t overheating,” Araoz said at the Bloomberg Summit in Lima yesterday. “Overheating is growth of 9 or 10 percent.”

Economists raised their growth forecasts for this year to 6 percent from 5.5 percent previously in a monthly central bank survey published June 5. The analysts kept their annual inflation forecast at 2.5 percent.

Prices for food and services are starting to reflect demand pressures, according to Jorge Gonzalez Izquierdo, head of economics at the Lima’s Pacifico University.

Gauging Inflation

Consumer prices climbed faster than economists forecast in May amid higher food and fuel costs. Annual inflation entered the central bank’s 1 to 3 percent target range for the first time in eight months in May, with prices climbing 1.04 percent from a year earlier and 0.24 percent from April.

The central bank plans to tighten monetary policy to ensure consumer prices are stable while demand strengthens, Velarde said in a statement published last week in the state gazette. Inflation is expected to remain within the target range and reach 2.2 percent by year-end, he said yesterday.

The central bank said May 28 the economy may expand 6.2 percent this year as investment spurs demand. The bank had forecast growth this year of 5.5 percent in a March 26 report.

South America’s sixth-largest economy expanded 8.8 percent in March from a year earlier and according to a June 2 report by BBVA Banco Continental could post year-on-year growth of 8.7 percent for April, as construction and manufacturing activity intensify.

Rate Outlook

BBVA Banco Continental expects policy makers to raise the benchmark rate by a quarter point today and to continue moving toward a more neutral monetary position “in the coming months.”

Recovering private investment will enable the government to trim 2.3 billion soles ($808 million) from the budget for services and investment projects after rising spending threatened to push the fiscal deficit to 2.4 percent of gross domestic product, over the authorized limit, Araoz said May 13.

The government aims to cut the fiscal deficit to 1.6 percent this year from 1.9 percent last year.

The Peruvian sol gained 1.5 percent this year through yesterday, the sixth-best performance among 26 emerging market currencies tracked by Bloomberg. At 11:30 a.m. New York time, the currency was little changed at 2.8456 per dollar from 2.8456 yesterday.

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

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