Peru Raises Rate to Two-Year High of 4.25% in Effort to Slow Inflation

Peru’s central bank raised its benchmark lending rate to the highest level in two years today after inflation last month accelerated above policy makers’ target for the first time since 2009.

The seven-member board raised the benchmark rate by a quarter point to 4.25 percent, matching the expectations of 13 out of 15 economists surveyed by Bloomberg. One economist forecast a half-point rise and one expected a pause.

Policy makers can afford to hold off accelerating the pace of monetary tightening, even as price pressures build, because companies are postponing investments until they know the outcome of next month’s presidential runoff, Hugo Perea, chief economist at BBVA Banco Continental. Inflation last month breached the 3 percent upper limit of Peru’s target range for the first time in almost two years.

“The deceleration in economic activity implies the central bank should make gradual movements in the benchmark rate,” Perea said in a telephone interview from Lima. “There is an uncertain economic context.”

Policy makers said the increase aimed to limit the impact of rising food and fuel prices on inflation and was part of their efforts to slow consumer prices back to target, according their statement posted on the bank’s web site. Future increases would depend on subsequent economic data, they said.

Finance Minister Ismael Benavides said in a May 3 interview that domestic demand is slowing as investors fret over the policies of ex-army officer Ollanta Humala, who is tied in polls with Congresswoman Keiko Fujimori ahead of the June 5 vote.

Election, GDP

Humala’s campaign platform includes a proposal to raise mining taxes and revise contracts with foreign companies. The one-time ally of Venezuelan President Hugo Chavez had 38 percent support in a Datum Internacional survey published today, compared with 41 percent for Fujimori.

The government expects gross domestic product to expand 6.5 percent this year, less than its previous forecast of 7.5 percent, Benavides said. GDP rose 8.5 percent in February from a year earlier, after surging 10 percent in January.

The central bank will use “conventional” policy tools after annual inflation last month breached the upper limit of its 1 percent to 3 percent target range for the first time in almost two years, bank President Julio Velarde said last week.

Food prices have risen more than expected in 2011, and the government will eventually have to raise gasoline prices that have been frozen since February to reflect higher crude oil prices, said Perea.

“The central bank needs to keep tightening to ease demand growth and to try to keep inflation expectations anchored,” he said.

Prices, Expectations, Target

Consumer prices rose 3.34 percent in April from a year earlier and 0.68 percent from March, beating analysts’ estimates. Food prices jumped 1.2 percent and clothing costs climbed 1 percent during the month. The monthly inflation rate was 0.7 percent in March, the highest in 33 months.

The jump in inflation reflected higher international prices for corn, wheat and cotton and the higher cost of food produced locally. Inflation was last above policy makers’ target in June 2009, when prices rose 3.06 percent from a year earlier.

Velarde on May 9 said inflation will top the upper limit of the bank’s target range in 2011. He added that inflation in May will be slower, and a decline in commodity prices will ease inflationary pressures.

The Andean nation’s consumer price index is the second-most exposed to food inflation among emerging markets, after the Philippines, according to the central bank. Food and drink costs account for 38 percent of the gauge.

Peruvian economists raised their 2011 inflation forecasts for a third straight month in April, forecasting a 3.5 percent rise, according to the central bank’s latest survey.

Regional Policies

Higher food and oil prices are pushing policy makers in South America to tighten money supply and cool consumer demand.

Chilean policy makers accelerated the pace of tightening at their last two meetings and raised by a greater-than-expected half-point to 5 percent today while Colombia’s central bank raised borrowing costs for a third straight month in April to head off inflationary pressures.

Brazilian central bank President Alexandre Tombini last week pledged that policy makers will raise interest rates for as long as needed to bring inflation back to their target in 2012.

Still, while the latest inflation readings in Chile and Colombia have been lower than expected and price rises may have peaked in Brazil, the outlook for Peru has deteriorated.

“Inflation is picking up steam,” said Kathryn Rooney Vera, an emerging markets analyst at Bulltick Capital Markets in Miami. She expects a further two increases to take Peru’s benchmark rate to 4.75 percent.

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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