Peru Keeps 4.25% Rate on Global Outlook and Commodity Fall

Peru’s central bank kept borrowing costs unchanged yesterday for a 13th month as global market turmoil and declining commodity prices threaten to derail a rebound in domestic investment.

The seven-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of all 18 economists surveyed by Bloomberg.

“Uncertainty has increased again in the international financial markets and as a result a decline in international commodity prices is being observed,” policy makers said in a statement posted on the central bank’s website.

Growth of South America’s sixth-largest economy accelerated in the first quarter for the first time since 2010 as investor confidence fueled a rebound in construction. Though rising demand may fuel inflation that’s been above target for 11 months, policy makers are more concerned about the effects of a global slowdown, said Siobhan Morden, head of Latin American fixed income strategy at Jefferies & Co Inc.

“Domestic demand is very strong but external risks have clearly worsened,” Morden said in telephone interview from New York. “They won’t hike rates not knowing the outcome of Europe. Central banks are typically conservative and don’t want to flip flop in terms of their policy management.”

‘Less Optimistic’

The price of copper, Peru’s top export, has dropped 19 percent in the last year as Europe’s recession damps growth in China, the biggest consumer of industrial metals, and amid concern the U.S. recovery is faltering.

The Andean country posted it’s a first trade deficit in two years in April as slower global growth curbed demand for metals and textiles, central bank research director Adrian Armas said today. The $144 million deficit compares with a $342 million surplus in April last year.

Exports fell 12 percent from a year earlier to $3 billion, a one-year low, on declines in copper, zinc and fishmeal prices, the Trade Ministry said June 5.

Business confidence weakened for the first time this year in May amid concern global demand will slow, Armas told reporters during a conference call.

The sol declined 0.1 percent to 2.68 per U.S. dollar at today’s close, from 2.6780 yesterday, according to Deutsche Bank AG’s local unit.

Less Optimistic

“There’s great uncertainty about what will happen to external demand and how it will hit economic activity,” Velarde said May 29. “We’re probably less optimistic than we would have been six weeks ago” about growth exceeding the central bank’s 5.7 percent forecast for this year, he said.

Increased social unrest has also clouded the outlook for the $176 billion economy, he said.

The government declared a state of emergency last week in the southern Andean province of Espinar after at least two people died in protests against an Xstrata Plc (XTA) copper mine that community leaders say is polluting water supply. Local residents are also demanding a bigger share of profits.

Newmont Mining Corp.’s (NEM) $4.8 billion Minas Conga gold project was suspended in November after street protests against what would be Peru’s biggest-ever investment. The protesters resumed demonstrations on May 31.

About $50 billion of mining investment is on stand-by because of the unrest, Finance Minister Miguel Castilla told state television June 4. The industry accounts for about 20 percent of fiscal revenue and 60 percent of exports. The investments are needed to fuel 6 percent growth this year and halt a decline in the country’s mining production, he said.

Economic Growth

Gross domestic product rose 6 percent in first three months of this year as private investment climbed at the fastest pace in three quarters and the government stepped up infrastructure spending.

Government tax revenue rose an annual 8.9 percent last month, the most since February, while demand for consumer goods fueled a 9.4 percent increase in imports, the tax and customs duty collection agency said June 4.

The central bank raised reserve requirements for the first time in a year on May 1, citing concern foreign inflows risk fueling demand for dollar-denominated loans and stirring inflation pressures.

Annual growth in bank lending slowed to 16 percent in April from 18 percent in March as demand for dollar loans eased, the central bank said last week.

Inflation

Consumer prices rose 0.04 percent in May, the slowest pace in four months, after food and fuel costs fell. Prices climbed 4.1 percent from a year earlier. The central bank targets annual inflation of 1 percent to 3 percent.

The annual rate will probably see “sharp” declines starting in July as international grain prices ease and as domestic food supply recovers after floods and landslides in the first quarter, Armas said. “Moderate” monthly inflation will probably allow the annual rate to return to the central bank’s target range this year, he said.

“Peru may want to hike once or twice more just to bring neutral rates to a slightly higher level” should external risks subside, Morden said. “If there were an extreme shock from Europe, there would be case for easing instead of hiking.”

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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