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Peru Keeps 4.25% Rate as Global Outlook Mutes Inflation

Aug. 12 (Bloomberg) -- Peru’s central bank kept its benchmark lending rate unchanged for a third month as slowing global economic growth outweighs above-target inflation as the biggest threat to the country’s commodity-dependent economy.

The seven-member board, led by central bank President Julio Velarde, yesterday kept the overnight rate at a two-year high of 4.25 percent, matching the estimates of 20 of 21 economists surveyed by Bloomberg. One analyst predicted a quarter-point increase to 4.50 percent.

“This decision takes into account the deceleration taking place in global economic activity,” the central bank said in the statement accompanying their decision. Policy makers also noted the slower pace of “some leading and coincident activity indicators” in Peru’s economy.

Slower global growth and a possible recession in the U.S., Peru’s biggest trading partner, will dent demand for commodities, which account for three quarters of the country’s exports. A 0.79 percent jump in consumer prices in July, the biggest in three years, was driven by “transitory” factors that will prove short-lived, said Hugo Perea, chief economist at BBVA Banco Continental.

“The inflation scenario for next year looks quite favorable,” Perea said in a telephone interview from Lima. “It’s going to be hard to keep inflation in the target range this year, but that’s not a big issue. It’s due to specific factors that will be diluted in the coming months.”

“Future adjustments in the benchmark rate will depend on new inflation data,” the bank’s statement said.

Confidence

The $153 billion economy expanded at the slowest pace in 15 months in May as companies scaled back spending during the country’s presidential elections.

President Ollanta Humala, who took office July 28, has sought to reassure investors by naming a market-friendly economic team led by Finance Minister Miguel Castilla and retaining Velarde in his post for a second five-year term.

The former army rebel pledged in his inaugural speech July 28 to maintain existing economic and monetary policies after his pledges to enlarge state companies, revise free trade accords and introduce a windfall mining tax clouded the outlook for the region’s fastest growing economy.

Though business confidence has improved, it’s still below pre-election levels and economic growth will likely remain “sub-par” in the third quarter, Italo Lombardi, an economist at BNP Paribas, said in a Aug. 5 report.

Regional Viewpoint

The central bank will pause while it gauges the threat Europe’s debt crisis and a U.S. slowdown pose to exports and foreign investment in South America’s sixth-biggest economy, said Mario Guerrero, an economist at Scotiabank Peru.

“Central banks across the region are communicating their deep concerns about rising global risks and deteriorating external conditions,” BNP Paribas said.

This may lead policy makers in Brazil and Colombia to join Peru and Chile “in the near future” and keep rates unchanged even as domestic demand remains “robust,” the bank said.

Peru is prepared for any slowdown in demand for its exports and will seek to spur private investment, construction activity and trade with neighboring countries to bolster domestic growth, Castilla told reporters in Lima Aug. 10. “We have the necessary fundamentals to withstand any blow, especially in the context of slower global growth.”

Indicators

Peru’s annual cement production fell for the first time in two years in June as construction activity eased in the mining, power, and retail industries, according to the National Statistics Institute.

Metal production contracted 10 percent from a year earlier and fishing output declined.

Peru is the world’s biggest silver producer, ranked third in copper and zinc, and sixth in terms of gold output. Mining over the last decade has accounted for 7.7 percent of gross domestic product and in 2009 contributed 27 percent of the government’s total tax take.

The nation’s imports declined for a second month in July, falling 1.6 percent from June to $3.08 billion, the government said yesterday.

With last month’s jump in consumer prices, led by higher prices for poultry and clothes and a seasonal rise in bus fares, Peru’s annual inflation rate rose to 3.35 percent, a two-year high, from 2.91 percent in June.

Though the annual rate breached the central bank’s 1 percent to 3 percent target range for the first time since June 2009, the rise in consumer prices was supply driven and won’t be repeated “in the coming months,” Banco de Credito del Peru said in an Aug. 4 report.

Neutral Rate

Monthly inflation will likely be slower than 0.25 percent through the end of the year, allowing the annual rate to converge with the target range “towards next year,” said Adrian Armas, the central bank’s research director.

Economic growth will be slower in the second half of this year compared with the first half, leading to reduced demand for credit, Armas told reporters in a conference call from Lima today.

Outstanding bank loans increased 1 percent to 144 billion soles ($52.5 billion) in June compared with May and rose 22 percent from a year earlier, according to the central bank.

Still, the central bank will probably have to increase the benchmark rate by a quarter-point to 4.50 percent before the end of the year as it seeks to keep inflation expectations anchored, said Perea.

“If domestic demand remains resilient and prices do not correct in the next three months, the central bank will be forced to hike again in the fourth quarter as the need to control inflation will mean moving above the neutral rate,” said Pedro Tuesta, a Washington-based Latin America economist at 4Cast Inc.

The central bank won’t raise beyond 4.50 percent this year as it is concerned about the sol’s 2.3 percent appreciation this year and doesn’t want to slow the pace of economic activity, Banco de Credito said.

The yield on the nation’s benchmark 7.84 percent sol-denominated bond due August 2020 has dropped 52 basis points since the central bank’s June 9 pause in rate rises led investors to bet rates would rise more slowly.

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

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.

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