Related News:
Peru May Raise Rate to 3% as Surging GDP Growth Threatens Inflation Target
Peru’s central bank may raise its benchmark lending rate today for a fifth straight month as the fastest economic expansion since 2008 threatens to accelerate inflation beyond the central bank’s target.
The seven-member board will probably increase the bank’s reference rate by a half-point to 3 percent from 2.5 percent, according to all 14 economists surveyed by Bloomberg. The board will announce its decision after 6 p.m. New York time.
Concern that growth in South America’s sixth-biggest economy may become unsustainable prompted the bank to raise the benchmark rate by a greater-than-expected half-point last month. Policy makers will probably maintain the current pace of rate increases as rising consumer and investor confidence, an improving labor market and credit growth threatens to send inflation above the bank’s 1 percent to 3 percent target range, said Alberto Ramos, an economist at Goldman Sachs Group Inc.
“The economy has gained a lot of momentum and no longer needs any level of monetary stimulus,” Ramos said in a phone interview from New York. “It’s likely inflation will exceed 3 percent by the end of the year.”
Inflation, which accelerated at the fastest annual pace in more than a year in August, is a concern for policy makers, central bank Governor Julio Velarde said in a Sept. 2 interview. Higher food costs caused consumer prices to rise 2.31 percent from a year earlier and 0.27 percent from July, a level Velarde described as “a little high.”
GDP Surge
After the economy expanded 0.9 percent in 2009, the slowest pace since 2001, increased business spending and rising inflows have made Peru the fastest growing among Latin America’s major economies. Gross domestic product jumped 10.1 percent in the second quarter, including an 11.9 percent expansion in June.
The economy will probably grow 7.5 percent to 8 percent in 2010, Velarde told lawmakers this week. The bank previously forecast 6.6 percent growth.
“The bank has been adjusting the interest rate because with this level of private investment we don’t believe an expansive monetary policy is necessary,” Velarde said. “We’re moving toward neutral terrain.”
Economists expect GDP growth of 7.5 percent in 2010 and annual inflation of 2.9 percent, according to a central bank survey released Sept. 3. They previously forecast 6.8 percent growth and 2.5 percent inflation.
‘Strong Demand’
Bank lending rose 19 percent from a year earlier to a record $35.9 billion through July on rising consumer spending and private investment. Electricity output, an indicator of manufacturing activity, increased 12 percent. Cement demand grew 13 percent in July, propelled by the construction of malls, homes and highways as well as mining and electricity projects.
Companies may invest $12 billion next year, in projects including Xstrata Plc’s $4.2 billion Las Bambas copper mine, the country’s largest ever investment project, Finance Minister Mercedes Araoz said Aug. 31.
“We’re seeing strong demand from export packaging, printing, consumer goods industries, and a real big demand for paint for apartment blocks,” Peter Anders, general manager of Quimica Anders SAC, a distributor of plastics and resins, said in an interview in Lima.
Sol, Assets
Peru was the second Latin American country after Brazil to raise borrowing costs in 2010. Rising borrowing costs have spurred overseas demand for the sol, which strengthened to a two-year high this week.
The currency has appreciated 3.4 percent against the U.S. dollar in 2010, the eighth-best performance among 25 emerging market currencies tracked by Bloomberg. At 10:58 a.m. New York time, it was little changed at 2.7935 per dollar.
The central bank has purchased $7.1 billion this year to slow gains in the sol, helping to boost foreign currency reserves to a record $40.2 billion.
In a bid to curb demand for the currency, policy makers also doubled the marginal reserve requirement for foreign banks this month to 120 percent of their short-term sol deposits.
The yield on Peru’s benchmark 8.6 percent sol-denominated bond due in 2017 has declined 81 basis points since June 8 to 5.24 percent, according to Citigroup Inc.’s local unit, reflecting increased demand for the country’s assets.
Five-year credit-default swaps tied to Peru’s bonds and used to hedge against losses traded at 1.24 percentage points yesterday, the lowest in Latin America after Chile and Panama, and 3 basis points lower than Brazil, according to data compiled by CMA DataVision.
The bank may make further reserve requirement adjustments to align dollar rates with those for soles, and at the same time slow gains in the currency, Mario Guerrero, a Scotiabank Peru economist, wrote in a Sept. 6 report.
To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net
Rate These Stories
Rate this Page