Peru May Keep 4.25% Rate as Inflation Bars Monetary Stimulus

Peru’s policy makers will probably keep their benchmark interest rate at a two-year high as above- target inflation prevents them from supporting the government’s bid to boost growth amid slowing global demand.

The central bank will keep the overnight rate at 4.25 percent today, according to all 13 economists surveyed by Bloomberg. The seven-member board, led by central bank President Julio Velarde, will announce its decision at about 6 p.m. New York time.

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. While policy makers have indicated a willingness to adjust rates if needed, last month’s faster-than-expected rise in consumer prices leaves little room to maneuver, said Michael Henderson, an emerging markets economist at Capital Economics Ltd.

“Inflation is above target and that will give the hawks in the central bank plenty of reasons not to be lulled into loosening policy,” Henderson said in a telephone interview from London.

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.

Prices for copper, Peru’s top export, have fallen 24 percent since July on concern that Europe’s sovereign-debt crisis may lead to a global recession.

Preparation

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.

“We’re ready to pull the trigger and unleash all the instruments we have at our disposal,” the central bank’s monetary policy manager, Jorge Estrella, said Oct. 7.

The central bank would probably weigh in by lowering reserve requirements if Europe heads toward a deeper recession, said Pedro Tuesta, a Latin America economist at 4Cast Inc., in a phone interview from Washington.

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.

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 that the 0.2 median estimate of analysts in a Bloomberg survey.

Inflation Dynamic

Though international grain and energy 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.

The bank chief also said that cutting rates “is not a remote possibility,” given that “what happens in the world will dictate whether it’s necessary or not.”

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.

Crisis Watch

Economists in the central bank’s survey see inflation slowing to 2.6 percent in 2012 and 2.5 percent in 2013, prompting Estrella to say yesterday 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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