Peru May Slow Pace of Rate Increases as Economy Cools

Peru’s central bank may slow the pace of interest rate increases at its monthly meeting today as moderating inflation allays concern that South America’s sixth-biggest economy is overheating.

The seven-member board will probably raise the bank’s reference rate by a quarter-point to 3.25 percent from 3 percent, according to 12 of 16 economists surveyed by Bloomberg. Three economists expect a third consecutive half-point increase, while one analyst forecasts a pause. The board will announce its decision after 6 p.m. New York time.

Consumer prices declined for the first time in 10 months in September and the pace of economic growth is easing, giving the central bank more time to move rates to a neutral level, said Daniel Volberg, an economist at Morgan Stanley in New York. Peru posted monthly deflation of 0.03 percent in September on lower costs for food, fuel and telephone calls.

“You don’t have a significant inflation threat under current conditions, and strong growth appears to be moderating somewhat,” Volberg said in a phone interview. “Some of the tightening will be done via reserve requirement hikes rather than interest rate hikes.”

The central bank introduced new securities this week designed to discourage investors from selling dollars in the local foreign-exchange market, and to temper demand for the sol. Last week, policy makers increased deposit requirements for a fourth time since June.

Peru’s economy is no longer in danger of overheating, after five interest rate increases and slower growth in public spending, central bank Governor Julio Velarde said Sept. 17. The bank may not need to be as “aggressive” at today’s meeting, he said at the time.

Growth, Unwind

July’s rise in gross domestic product was lower than analysts forecast, slowing to 9.1 percent from a year earlier compared with 11.9 percent in June, as the government tempered the pace of spending on public works and fishing output fell.

Growth continues to ease, according to economic indicators for August. Cement demand advanced more slowly than in July while fishing, mining, and agricultural activity contracted, according to the National Statistics Institute.

The pace of annual growth may have slowed to 8.7 percent in the third quarter from 10.1 in the second quarter, according to the central bank.

The government is winding up investments under its stimulus package, which will lower the risk of demand-led pressures sending consumer prices higher, BBVA Banco Continental said Oct. 1. The annual inflation rate last month rose to 2.37 percent from 2.31 percent a month earlier, near the middle of the bank’s 1 percent to 3 percent target range.

Rates, Inflows, Sol

Rising inflows as well as increased company and government spending propelled Peru to the fastest GDP growth since 2008 in the second quarter. Concern the expansion may be unsustainable prompted the bank to increase its reference rate in August and September at a faster pace than at its previous three meetings.

Private investment continues to spur demand for credit, which caused bank lending to rise 19 percent in August from a year earlier, the fastest annual growth since April 2009.

Last week’s increase in deposit requirements for a fourth time since June signaled that while policy makers are uneasy with surging credit growth, they are also concerned higher interest rates will draw more foreign capital into the country and increase volatility in the sol, Volberg said.

“The gradual slowing in economic growth and price rises will be the trend for the coming months, because of the steps taken by the central bank and the Finance Ministry, and the statistical base,” Mario Guerrero, an economist at Scotiabank Peru, said in a phone interview from Lima.

Foreign Capital

Foreign capital inflows attracted by higher interest rates helped push the sol up 3.6 percent against the dollar this year, the fifth-best performance against the dollar among the seven major Latin American currencies tracked by Bloomberg.

At 11:20 a.m. New York time, it rose 0.1 percent to 2.7880 per dollar.

The central bank purchased $8.74 billion in the first nine months of this year to temper the currency’s gains, helping to make the sol the tenth-worst performer among 25 emerging market currencies tracked by Bloomberg.

Speculation the bank will start to withdraw monetary stimulus more slowly has prompted the yield on Peru’s benchmark 8.6 percent sol-denominated bond due August 2017 to decline to an eight-month low of 4.95 percent today.

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