Peru Keeps 4% Rate for Fifth Month on Reserve Requirement Cuts

Peru kept borrowing costs unchanged amid expectations that reserve requirement cuts over the last year will help sustain the current expansion.

The seven-member board, led by bank President Julio Velarde, maintained the overnight rate at 4 percent for a fifth straight month yesterday, matching the estimates of all 15 economists surveyed by Bloomberg.

Indicators and surveys “point to dynamic economic activity in the first half of this year though a slower pace than expected,” the central bank said in a statement accompanying its decision. The board is “ready to consider additional monetary policy measures if needed.”

Policy makers this month cut the reserve requirement ratio for the eighth time in nine months to boost lending as falling exports from the world’s third-largest copper producer damp private investment. First-quarter indicators suggest growth quickened from January’s eight-month low of 4.2 percent without stirring inflation pressures, said Roberto Flores, the head of research at Inteligo SAB, a Lima-based brokerage.

Investment, China

South America’s sixth-largest economy expanded 5.6 percent last year, the slowest pace since 2009, as slowing Chinese demand triggered a slump in copper shipments that account for a quarter of Peru’s exports. Copper prices have fallen 11 percent this year, adding to a 7.2 percent drop in 2013. Gold, Peru’s second-largest export, has risen 9.8 percent this year.

The central bank cut its benchmark lending rate for the first time in four years in November and has freed up almost 8 billion soles ($2.9 billion) for lending since June by easing reserve requirements. President Ollanta Humala’s government has pledged to curb red tape slowing mining and energy projects and is touting $13 billion of infrastructure contracts to shore up investment.

The annual pace of growth probably quickened to 5.2 percent in February while cement and electricity demand and export volumes rose in March, Velarde told reporters April 2.

“We see clear signs of recovery in almost all the economic indicators,” Finance Minister Miguel Castilla told reporters in Lima yesterday. “We’ll probably see that private investment touched bottom in the first quarter,” and will accelerate to grow 5 percent in 2014, he said.

‘Highly Positive’

Demand for televisions and cars has weakened after the 8.8 percent depreciation in the sol last year increased prices for imported goods, Velarde said. Though Peru’s mining output rose less than expected in January, the outlook for the industry is “still highly positive,” he said.

In a central bank survey conducted last month, economists reduced their 2014 growth forecasts to 5.4 percent from 5.6 percent a month earlier and to 5.7 percent from 5.9 percent for next year, the central bank said April 4.

Economist raised their inflation projection to 2.8 percent from 2.6 percent for this year and maintained their 2.5 percent estimate for 2015.

Annual inflation slowed to 3.38 percent last month from 3.78 percent in February. The central bank targets inflation in a 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 editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Robert Jameson, Philip Sanders

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