Peru, Chile Likely to Hold Rates Steady Amid Sustained Growth

Chile and Peru probably will decline to follow Brazil’s lead in cutting interest rates today as sustained economic growth and slowing inflation in each country give central bankers little reason to alter monetary policy.

Policy makers in Chile will keep borrowing costs at 5 percent for the sixth straight month, while their counterparts in Peru will keep their overnight rate at 4.25 percent for a 14th straight meeting, according to the median estimates in Bloomberg surveys of economists.

The two Andean economies will be among Latin America’s fastest growing in 2012 while also posting some of the region’s lowest inflation rates, according to International Monetary Fund forecasts. In contrast to Brazil, where growth has practically stalled, Chilean and Peruvian policy makers are under less pressure to stimulate demand even as concerns persist over contagion from Europe’s debt crisis, economist Alfredo Coutino said.

“Chile and Peru are still expanding at rates that even exceed their potential,” Coutino, Latin America director at Moody’s Analytics, said by phone from West Chester, Pennsylvania. “The external economy hasn’t had a significant negative impact.”

Brazil’s economy, which is Latin America’s largest, will fall short of the region’s average in posting 3 percent growth in 2012, according to the IMF. Brazilian industrial output fell in May for a third month and retail sales fell by the most in more than three years.

Regional Policies

Policy makers in Brazil yesterday led by President Alexandre Tombini lowered benchmark borrowing costs by 50 basis points to a record 8 percent yesterday, to revive economic growth. They have lowered rates 4.5 percentage points since August, the most among Group of 20 nations.

Elsewhere in Latin America, the central bank of Mexico has kept its benchmark at 4.5 percent for 27 straight meetings in contrast to Banco de la Republica Colombia, which has raised borrowing costs nine times since the beginning of 2011.

Gross domestic product in Chile and Peru will expand 4.3 percent and 5.5 percent respectively this year, surpassing the 3.7 percent average growth rate for the region, the Washington- based IMF said in its latest forecasts. Inflation will average 3.8 percent in Chile and 3.3 percent in Peru, compared with 6.4 percent for Latin America, the IMF said.

Consumer prices in Chile eased to a 16-month low of 2.7 percent in June from a year earlier, compared to the nine-month low of 4 percent posted in Peru. Chile’s central bank targets annual inflation of 2 percent to 4 percent while Peru’s bank targets 1 percent to 3 percent.

The most recent quarterly growth reports in the two Andean economies support the IMF’s gross domestic product forecasts for 2012.

Growth, Exports

GDP in Chile, the world’s largest copper producer, expanded 5.6 percent in the first quarter from last year, which Peru outpaced with a 6 percent expansion in the same period, the fastest growth among Latin America’s seven biggest economies.

Growth in Brazil, the world’s second-biggest emerging market after China, decelerated to 0.8 percent in the same period, the slowest rate among Latin America’s seven biggest economies. At 4.6 percent, Mexico’s quarterly GDP growth was the region’s sixth best.

With more than half of their export revenue coming from commodities, Chile and Peru also are vulnerable to a deterioration of the euro region’s sovereign-debt crisis and China’s economic deceleration.

The average price of commodities has fallen 7.9 percent since the end of February, according to the Bloomberg commodity index, which calculates the mean of indexes including energy, grains, food and metals.

‘Nobody Is Bullet-Proof’

Chile in May posted its first trade deficit in nine months on a decline in exports while the government this month cut forecasts for 2012 economic growth and copper prices.

Chile’s Finance Ministry has prepared a contingency plan that would entail tapping its $15 billion sovereign-wealth fund to stimulate the economy if investment and hiring slow.

“Brazil practically has stopped growing and Argentina is slowing abruptly, so it’s positive that our country has a healthy economy that is able to resist,” Chilean President Sebastian Pinera, a billionaire entrepreneur and Cambridge, Massachusetts-based Harvard University-trained economist, said in a July 5 speech. “But nobody is bullet-proof or shielded.”

Chile’s peso has gained 5.6 percent against the dollar in 2012, the second-best performance among the seven major Latin American currencies tracked by Bloomberg after Colombia’s peso, and Peru’s sol is up 2.3 percent.

‘Rates Are Stuck’

Peru had a $34 million trade gap in April, its first deficit in three years, which widened to $106 million in May. Year-on-year growth in Peru slowed to 4.4 percent in April, though analysts surveyed by Bloomberg forecast that the statistics agency next week will report a faster pace for May.

The government last month added $750 million to an economic stimulus package in a move Peru’s Finance Minister Miguel Castilla described as “preventive” amid a deteriorating outlook for metals and manufacturing exports.

Peru may reach or exceed its economic growth targets this year, bolstered by domestic demand, central bank President Julio Velarde, said in an interview yesterday in Shanghai.

Chinese investment in Peru, South America’s sixth-biggest economy, is projected to rise this year and next, Finance Minister Miguel Castilla said in an interview in Shanghai yesterday.

Investment may grow to $20 billion in the next six to seven years from $2 billion, he said. China is the world’s biggest consumer of industrial metals. Peru is the top silver producer, number three in copper and sixth in gold.

Increased government outlays, and annual growth of more than 10 percent in private investment and consumer demand, will keep Peru’s GDP rising in line with potential through 2013, Pablo Secada, the chief economist at Peruvian Economy Institute, said by telephone from Lima.

“We may see an easing bias at some point,” Secada said. “But for now, rates are stuck.”

To contact the reporters on this story: Randall Woods in Santiago at rwoods13@bloomberg.net; 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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