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Peruvian Central Bank's Reserve Requirement Increase May Stem Sol's Gains
The Peruvian sol’s appreciation may slow after the central bank yesterday announced plans to raise reserve requirements on foreign deposits, according to Scotiabank Peru.
Banco Central de Reserva del Peru raised the marginal reserve requirement for foreign banks to 120 percent of their short-term sol deposits in the Andean country, up from the current 65 percent, the central bank said in an e-mailed statement yesterday. The new mandate goes into effect Sept. 1.
The higher reserve requirement will likely act “relatively quickly” to ease the pace of capital inflows seeking to gain from rising interest rates in Peru, said Guillermo Arbe, chief economist at Scotiabank Peru. Foreign investors will have fewer options for moving short-term capital into the country, Arbe said.
“A 120 percent mandate makes it too onerous for local banks to accept these deposits from overseas,” Arbe said in a phone interview from Lima. “It’s not going to reverse the sol’s trend but may cause it to stabilize.”
The sol weakened today after strengthening to a two-year high yesterday. At 4:19 p.m. New York time it traded at 2.7990 per dollar, a 0.1 percent decline. The currency has appreciated 3.2 percent in 2010, the seventh-best performance among 25 emerging market currencies tracked by Bloomberg worldwide.
Regional Currencies, Growth
Elsewhere in the region, policy makers in Brazil, Chile and Colombia are also confronting surging local currencies.
Peruvian central bank Governor Julio Velarde’s counterparts in those countries have begun to unwind stimulus measures put in place during the global financial crisis while Brazil and Colombia like Peru have also bought dollars to cap currency gains.
Peru’s central bank has raised its reference rate four times since May, and increased deposit requirements, to prevent faster-than-expected economic growth from fuelling inflationary pressures.
Other central bank measures to curb volatility in the sol this year include increasing the limit on private pension funds’ overseas investments, imposing limits on the funds’ daily currency trades, and purchasing $6.8 billion in the foreign exchange market, including $83 million today.
The central bank’s focus is on “smoothing appreciation of the sol, not derailing it,” said BNP Paribas SA in a report issued today. BNP Paribas said it has revised its forecast for the currency to strengthen to 2.70 by the end of June 2011, from 2.75 previously.
The yield on the government’s benchmark 8.6 percent sol- denominated bond due 2017 has declined 92 basis points since June 8, reflecting increased overseas demand for the country’s assets. The bond’s yield rose two basis points, or 0.02 percentage points, to 5.13 percent in trading today, according to Citigroup Inc.’s local unit.
Growth, Carry, Inflation
Gross domestic product surged 11.9 percent year on year in June, led by the fastest growth in manufacturing since 1994. The national statistics agency today said in an e-mailed report that GDP expanded 10.1 percent in the second quarter from the same period a year earlier, the fastest quarterly growth since 2008.
The bank last raised reserve requirements for foreign deposits to 65 percent on Aug. 8 from 50 percent and up from 35 percent in June.
The latest increase seeks to deter “short-term speculative funds” from entering the Peruvian financial system and destabilizing the currency, the bank said.
A widening interest-rate gap between Peru and the U.S. may entice Peruvian companies to borrow dollars abroad at lower yields, boosting the amount of foreign currency they bring into the country and strengthening the sol, bank Governor Velarde said in an Aug. 16 interview.
Inflation may be “pretty well-subdued” in August, giving the central bank more time to consider its next rate move, he said.
To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net
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