Peru Keeps Key Rate at 4% on First Signs of Economic Recovery

Peru kept borrowing costs unchanged after central bank President Julio Velarde said the economy was showing the first signs of recovery following a slump in investment.

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

Construction and manufacturing are picking up as the government spurs infrastructure investment to offset a drop in the price of copper, the country’s biggest export. While the central bank on April 25 cut its forecast for gross domestic product growth this year to 5.5 percent from 6 percent on lower-than-expected copper output, domestic demand is growing close to potential and inflation remains above its target, said Pedro Tuesta, an economist at 4Cast Ltd.

“The case for a cut is shaky because the fall in GDP isn’t because of demand but because of a supply shock and the same applies to inflation,” Tuesta said by telephone from Washington. “As long as they can’t detect an impact on inflation expectations, they won’t feel the need to hike rates.”

Growth in Peru, the third-largest copper, zinc and silver producer, eased to 5.6 percent in 2013, the slowest pace since 2009. Expansion probably eased further to between 5 percent and 5.5 percent in the first quarter as private investment touched bottom, Finance Minister Miguel Castilla said April 10.

Government Stimulus

The auction of infrastructure contracts will help the economy recover, Velarde told reporters April 25. Though cement and electricity output signal the economy is gaining momentum, the bank wants to see more evidence that the recovery has taken hold, Velarde told reporters April 25. Cement demand rose 6 percent in March from a year earlier while electricity output expanded 6.8 percent, according to the central bank.

“The indicators are positive but there’s still not a clear recovery trend,” Velarde said. The auction of infrastructure contracts will help the economy recover, he said.

The government plans to auction rights to a record $12 billion in infrastructure projects this year, while public works spending will rise to a 30-year high, Castilla said. Work on Lima’s first subway line, Peru’s biggest-ever infrastructure project, is due to start next month.

Imports climbed 4.3 percent in March from the year earlier on the strength of domestic demand, while exports plunged 21 percent on lower metal shipments, the country’s statistics agency said May 1.

The central bank kept the reserve requirement ratio for soles unchanged this month after eight cuts in the previous nine months freed up 8.5 billion soles ($3.1 billion) for lending.

Consumer prices rose 0.39 percent last month and climbed 3.52 percent on an annual basis, exceeding the central bank’s target range of 1 percent to 3 percent for a fourth month.

Inflation will slow to 2.8 percent by December as food prices ease, allowing the central bank to keep rates on hold for the rest of this year, Joao Ribeiro, an analyst at Banco de Credito del Peru, said May 6 in a e-mailed report to clients.

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 Philip Sanders, Robert Jameson

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.