Peru Keeps 4.25% Rate for Ninth Meeting on Lower 2012 Inflation Estimate

Peruvian policy makers kept borrowing costs unchanged for a ninth month yesterday on expectations that inflation will slow to the mid-point of their target range by year-end amid an improved global outlook.

The seven-member board, led by bank President Julio Velarde, held the overnight rate at 4.25 percent, matching the forecasts of all 16 economists surveyed by Bloomberg. Yesterday’s decision represented the ninth straight meeting at which policy makers kept the rate unchanged, the longest such streak since 2007.

“This decision takes into account the slower growth being recorded by some spending components, international financial risks and the fact that quickening inflation has mainly reflected temporary supply factors,” policy makers said in their statement posted on the central bank’s website.

Growth in South America’s sixth-largest economy accelerated for the first time in four months in December as the government rolled out stimulus spending to counter waning global demand for its metal and manufacturing exports. At the same time, the annual inflation rate fell from a two year-high of 4.74 percent last month.

Policy makers in their statement yesterday said they expect a 2 percent inflation rate by year-end. Policy makers also said future rate decisions will depend on the available inflation data.

“In our view, the board is assessing risks to growth and inflation as balanced. The concerns about deteriorating global conditions and the possible need to pre-emptively cut rates to protect the economy from external headwinds are all but gone,” Nader Nazmi, a senior Latin America economist at BNP, wrote in a note e-mailed to clients after the decision.

Stimulus, Growth

Peru unveiled plans in November to spend as much as $3.5 billion to shore up domestic demand on concern recession in Europe could spread to China and the U.S., the Andean nation’s top trading partners.

The economy expanded faster than expected in December as the government pumped up investment in public works, Finance Minister Miguel Castilla said Feb. 7.

Castilla said the government may revise its forecast for 2011 economic growth, which will be reported Feb. 28, to about 7 percent from 6.8 percent.

Public investment jumped 39 percent to a record 500 million soles ($186 million) last month from a year earlier, according to the Finance Ministry. The government is targeting a 30 percent increase this year to compensate for slowing spending by companies.

Mining Questions

Though the global outlook has improved since the start of the year, anti-mining protests in Peru may deter investment and damp domestic demand, said Felipe Hernandez, an analyst at RBS Securities Inc. in Stamford, Connecticut.

Newmont Mining Corp (NEM) suspended its $4.8 billion Minas Conga gold project in November after two weeks of protests that sometimes became violent. Opponents to what would be the country’s biggest-ever investment project resumed street protests Feb. 1.

Government officials have held talks with communities in three other mining regions in the past month to stem spreading unrest.

The government will ask companies including Hochschild Mining Plc and Hudbay Minerals Inc. to suspend mining operations in the southern Andes during a 30-day environmental review after villagers said mines are polluting the area, Cabinet Chief Oscar Valdes’s office said yesterday.

Sentiment

Though business sentiment has improved after President Ollanta Humala revamped his Cabinet in December to better deal with the protests, investor confidence won’t return to levels seen prior to his election in June so long as the Conga project remains on hold, said Hernandez.

Business confidence rose in January for the first time in three months, according to a central bank survey published Feb. 3.

A separate survey by the bank showed economists forecast that the economy will expand 5 percent this year, compared with 5.3 percent in the previous month’s survey. Inflation expectations for 2012 declined to 2.9 percent from 3 percent.

Consumer prices fell the most in 15 months in January as the cost of food and bus fares eased.

Annual inflation slowed to 4.23 percent from December, and will continue to decelerate this year, creating leeway for the central bank to ease its monetary policy stance to shore up demand, said Roberto Flores, the head of research at Inteligo SAB, a Lima-based brokerage.

The Peruvian sol has strengthened 0.4 percent since the end of December to 2.6865 per U.S. dollar yesterday, according to Deutsche Bank AG’s local unit.

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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