Peru Likely to Keep 4.25% Rate as Credit Pinch Fights Inflation

Peru’s central bank probably will keep borrowing costs unchanged for the 17th consecutive month today as it seeks to balance inflation risks resulting from strong growth with concern that the global economic outlook is deteriorating.

The five-member board, led by bank President Julio Velarde, will maintain the overnight rate at 4.25 percent, according to all 16 economists surveyed by Bloomberg. The decision will be announced at about 6 p.m. in Lima.

Policy makers increased reserve requirements Oct. 1 for a second straight month as consumer demand fuels credit growth and investors move money into South America’s fastest growing economy. While inflation accelerated for a fourth month in September, the bank won’t raise its key rate as stagnation in Europe threatens Peru’s metal exports, said Michael Henderson, an economist at Capital Economics Ltd.

“Policy makers still have one eye on troubles in the euro zone while domestically inflation is a bit stronger than they’d be comfortable with,” Henderson said in a telephone interview from London. “There are risks on both sides, which is why you see them doing incremental tightening using macro-prudential measures.”

The central bank increased the average reserve requirement by 0.5 percentage point for local and foreign currencies this month, after a similar increase in September. Banks’ average ratio was 16.2 percent for soles in August and 39.5 percent for dollars.

Balance of Risks

While annual inflation has slowed to 3.74 percent from 4.74 percent in December 2011, it has been above the top of the central bank’s target range of 2 percent plus or minus 1 percentage point since June 2011.

The bank is tightening money supply after credit growth expanded 17 percent in August, the strongest pace in five months, amid rising consumer demand and private investment.

The $176 billion economy expanded 7.2 percent in July, the fastest pace in 11 months, as construction activity surged. The government is rolling out an infrastructure-heavy fiscal stimulus package equivalent to 2.5 percent of gross domestic product to offset falling exports.

Shipments overseas fell 4 percent to $29.6 billion in the first eight months of 2012 on lower copper and gold prices, Juan Varilias, president of exporter association Adex, said in an Oct. 4 e-mail. Exports dropped 20 percent in August from a year ago, he said. Metals account for almost two thirds of Peru’s sales overseas.

Fastest Growth

Peru will be South America’s fastest growing economy in 2012 and 2013, expanding 6 percent and 5.8 percent respectively, according to the International Monetary Fund. The Washington- based lender cut its global growth forecasts Oct. 9 and warned of “alarmingly high” risks of a steeper slowdown as the euro area’s debt crisis escalates.

Peru’s consumer prices rose 0.54 percent in September, the fastest pace in six months, the national statistics agency said Oct. 1. The increase pushed the annual inflation rate up for a second straight month

Though last month’s price increases were a bit higher than the central bank was expecting, the annual rate will slow to 3 percent by the end of December, Velarde told reporters Oct. 3. Consumer prices will rise 0.1 percent a month in the current quarter, he said.

“The central bank uses its benchmark rate to manage inflation and that’s calculated to end the year within the target range. There’s no need to use this tool,” said Carlos Montalvan, chief executive officer at Interfondos SAF, the country’s fourth-largest mutual fund manager, in an Oct. 4 interview. “There’s still a small possibility that Europe will fall over, so it’s better for the bank to keep the rate at 4.25 percent and have margin to lower it quickly than to use it today and be left without bullets.”

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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