Peru Keeps 4.25% Rate After Central Bank’s Reserve Reductions

Peru’s central bank kept borrowing costs unchanged for a 28th straight month after reducing reserve requirements to counter slower growth.

The five-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of all 15 economists surveyed by Bloomberg. Peru ties Malaysia for the longest interest-rate pause in developing countries.

Policy makers lowered reserve requirements last month and cut their 2013 growth forecast to 5.8 percent from 6.1 percent three months ago after a slump in metal exports. A rise in inflation above the central bank’s target range will prove temporary, allowing the central bank to continue cutting reserve requirements, HSBC Holdings Plc said in a Sept 9 report.

“We expect slower growth to tame inflation over the coming months and allow the central bank to keep rates on hold for the rest of this year,” said David Rees, an analyst at Capital Economics Ltd in London. “The next move in rates will eventually be down if Chinese demand for metals exports weakens and the Peruvian economy subsequently slows.”

The price of copper, Peru’s biggest export, has fallen 12 percent this year hurting business sentiment in the world’s third-largest producer of the metal.

The economy expanded 4.4 percent in June, less than the 5 percent forecast by analysts surveyed by Bloomberg. Growth has lagged behind economists’ estimates in six of the last seven months.

‘Cycle Ended’

Exports fell 19.5 percent in July from a year earlier while imports climbed 1 percent, leaving a record $486 million trade gap, the government’s statistics agency said Sept. 10.

Business sentiment is showing signs of improvement after the government pledged to speed up approvals of permits and reduce red tape slowing private investment to compensate for weaker export demand, Finance Minister Miguel Castilla said Aug. 28. The government will maintain plans to boost investment by 20 percent this year, he said.

“Businesses are still investing but they realize the economy has slowed down since the last quarter of last year and that business plans were too optimistic so they revised them,” said Pablo Secada, the chief economist at the Peruvian Economy Institute in Lima. “It’s not a self-fulfilling prophecy, it’s just the cycle ended.”

The central bank has sold $3.3 billion of the U.S. currency since July 2 to support the sol after the currency fell 8.2 percent in the first half of this year.

Depreciation has fueled imported price pressures and pushed the annual inflation rate to 3.28 percent in August, above the bank’s target range of 1 percent to 3 percent.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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