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Peru Seen Keeping 4.25% Rate as Economy Rebounds on Stimulus

Peruvian policy makers will probably keep borrowing costs unchanged for a ninth month today as they weigh the success of fiscal stimulus in offsetting the effect of Europe’s debt crisis.

The central bank will maintain the overnight rate at 4.25 percent, according to all 16 economists surveyed by Bloomberg. The seven-member board, led by bank President Julio Velarde, will announce its decision at about 6 p.m. local time.

Growth in South America’s sixth-largest economy accelerated for the first time in four months in December as the government rolled out stimulus spending to counter waning global demand for its metal and manufacturing exports. Though inflation eased from a two year-high of 4.74 percent last month, the central bank won’t lower rates unless Europe’s debt turmoil intensifies, said Enrique Alvarez, the head of Latin America fixed-income research at IdeaGlobal.

“They’re not going to cut rates with inflation so far outside the target’s upper bounds,” Alvarez said in a phone interview from New York, referring to the country’s inflation target of 1 percent to 3 percent. “A crash in Europe would have to develop before they’d cut.”

Peru unveiled plans in November to spend as much as $3.5 billion to shore up domestic demand on concern recession in Europe could spread to China and the U.S., the Andean nation’s top trading partners.

Public Works, Mining

The economy expanded faster than expected in December as the government pumped up investment in public works, Finance Minister Miguel Castilla said Feb. 7.

Castilla said the government may revise its forecast for 2011 economic growth, which will be reported Feb. 28, to about 7 percent from 6.8 percent.

Public investment jumped 39 percent to a record 500 million soles ($186 million) last month from a year earlier, according to the Finance Ministry. The government is targeting a 30 percent increase this year to compensate for slowing spending by companies.

The Peruvian sol has strengthened 0.3 percent since the end of December to 2.6880 per U.S. dollar at 10:27 a.m. in Lima, according to Deutsche Bank AG’s local unit.

The yield on the nation’s benchmark 7.84 percent sol-denominated bond due August 2020 has fallen 12 basis points, or 0.12 percentage point, this year to 5.63 percent, according to prices compiled by Bloomberg.

Business Confidence

Though the global outlook has improved since the start of the year, anti-mining protests in Peru may deter investment and damp domestic demand, said Felipe Hernandez, an analyst at RBS Securities Inc. in Stamford, Connecticut.

Newmont Mining Corp suspended its $4.8 billion Minas Conga gold project in November after two weeks of protests that sometimes became violent. Opponents to what would be the country’s biggest-ever investment project resumed street protests Feb. 1.

Government officials have held talks with communities in three other mining regions in the past month to stem spreading unrest.

Though business sentiment has improved after President Ollanta Humala revamped his Cabinet in December to better deal with the protests, investor confidence won’t return to levels seen prior to his election in June so long as the Conga project remains on hold, said Hernandez.

Business confidence rose in January for the first time in three months, according to a central bank survey published Feb. 3.

‘Political Noise’

A separate survey by the bank showed economists forecast that the economy will expand 5 percent this year, compared with 5.3 percent in the previous month’s survey. Inflation expectations for 2012 declined to 2.9 percent from 3 percent.

Consumer prices fell the most in 15 months in January as the cost of food and bus fares eased.

Annual inflation slowed to 4.23 percent from December, and will continue to decelerate this year, creating leeway for the central bank to ease its monetary policy stance to shore up demand, said Roberto Flores, the head of research at Inteligo SAB, a Lima-based brokerage.

“Deflation could mean the economy is being held back by political noise,” said Pedro Olaechea, president of the National Society of Industries, in a Feb. 7 interview in Lima. “We’re more worried by the political noise surrounding investment than we are by a default in Greece.”

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