Peru Raises Reserve Requirement to Ease Inflation Pressure

Peru’s Central Bank President Julio Velarde
Peru’s central bank President Julio Velarde. Photographer: Jonathan Fickies/Bloomberg

Peru’s central bank increased reserve requirements for a second straight month to ease inflation pressures amid surging demand for credit, goods and services.

Banco Central de Reserva del Peru raised the average reserve rate by 0.25 percentage point of banks’ sol- and dollar-denominated deposits. The increase takes effect March 1, the central bank said in an e-mailed statement yesterday.

Policy makers have raised both the reserve ratio and the benchmark rate twice this year as bank lending feeds a boom in private investment and consumer demand in the $153 billion economy. The central bank is seeking to prevent rising international prices for food and crude oil from contaminating other parts of South America’s sixth-largest economy, bank president Julio Velarde said last week.

“They’re trying to deflate any potential bubble in the credit market and moderate demand-side pressures on inflation,” said Benito Berber, a currency strategist at Nomura Securities Inc, in a phone interview from New York. “The risk is that by the end of the year inflation could have tripled. They’re putting the brakes on right now.”

Higher commodity prices sparked the fastest monthly inflation in more than two years in January and will likely push the annual rate “very close” to 3 percent, Velarde told reporters Feb. 24.

Consumer Prices

February’s rise in consumer prices is forecast to match January’s 0.39 percent month-on-month increase, according the median estimate of eight analysts surveyed by Bloomberg. The annual inflation rate for February is projected to rise to 2.2 percent, compared with 2.17 percent in January.

Though higher food prices pushed inflation up this month, lower electricity tariffs, sales tax and the government’s decision to freeze fuel prices should help contain pressures, Bertrand Delgado, an economist at Roubini Global Economics in New York, wrote today in a report today.

Peru’s national statistics agency will issue its monthly inflation report tomorrow.

Global food costs jumped 25 percent last year to an all-time high in December, according to the United Nations. Peru is a net importer of crude oil, soybeans, corn, wheat and sugar.

Hard Battle

“If soft commodity prices keep going up and this is a structural shift, the only way to limit the impact on inflation is to let the currency appreciate,” Berber said. “The battle of the currencies is a very hard one for everybody but especially for Peru, given it is the Latin American country most exposed to food and energy shocks.”

Peru’s sol gained 0.1 percent to 2.7745 per U.S. dollar at the close of trading, from 2.7765 on Feb. 25.

Outstanding bank loans rose 19 percent to 110 billion soles ($39.6 billion) in January from a year earlier, the Andean country’s banking association Asbanc said last week.

The monthly growth rate in company and household credit slowed to 0.8 percent in January from 1.9 percent in December, the central bank said in a report dated Feb. 25. Annual growth in credit, including the loans by the overseas units of Peruvian banks to Peru-based clients, rose 21 percent from a year earlier, the bank said.

Sol Volatility

The increase in the reserve ratio seeks “to keep inflation expectations anchored within the 1 percent to 3 percent target range,” the bank said in yesterday’s statement.

The central bank extended reserve requirements to include the overseas units of domestic lenders for the first time on Jan. 1 as it seeks to prevent short-term capital inflows from increasing volatility in the sol.

Peruvian banks’ average reserve requirement was 12.1 percent during Feb. 1 to Feb. 22, according to central bank data.

Economic growth accelerated in the fourth quarter as infrastructure projects boosted construction output. Gross domestic product rose 2.2 percent from the third quarter, the government’s statistics agency said today in an e-mailed report.

GDP climbed 9.2 percent in the fourth quarter from the same period a year earlier, taking growth for 2010 to 8.8 percent, the agency said. Analysts forecast a 9.1 percent year-on-year expansion in the fourth quarter, according to the median estimate of 10 economists surveyed by Bloomberg.

“Growth will probably be close to 9 percent in the first quarter, and that’s very high,” said Pedro Tuesta, a Washington-based economist for Latin America at 4Cast Inc, in a phone interview. “The central bank will keep tightening to stay ahead of the curve.”

Household Demand

Business and household demand for goods and services rose at the fastest annual pace since 2008 in the fourth quarter, the central bank said in a separate report dated Feb. 25.

Employment rose 3.9 percent through October from the same period a year earlier, the bank said. Sales of family cars surged 65 percent in the fourth quarter and rose to a record 74,000 units for the year, the bank said.

Outlays in mining, energy and infrastructure projects, including Xstrata’s $1.47 billion Antapaccay copper mine, spurred a 22 percent rise in private investment last year, the central bank said. Government spending on public works accounted for 6 percent of GDP in 2010, a 25-year high, the bank said.

Inflows were boosted last year by $7.33 billion of foreign direct investment and $3.2 billion in purchases of sol-denominated bonds by overseas investors, it said.

Remittances rose to a record $2.53 billion in 2010, the central bank said today in an e-mailed statement.

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