Peru Likely to Keep 4.25% Rate as Stimulus Boosts Economy

Peruvian policy makers will probably keep borrowing costs unchanged for an 11th month as the government’s fiscal stimulus and rising business confidence bolster the economic outlook.

The central bank will maintain the overnight rate at 4.25 percent, according to all 10 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.

South America’s sixth-largest economy will expand faster than expected this year as public investment soars and stronger U.S. growth boosts the outlook for exports in the third-biggest copper-producing nation, the bank said in a March 23 report. Policy makers will probably keep rates on hold for the rest of this year on concern that Europe’s debt crisis may choke the U.S. recovery, even as Peru’s inflation remains above target, said Hugo Perea, the chief economist at BBVA Banco Continental.

“Domestic demand has helped shield the economy from the global slowdown,” Perea said by phone from Lima. “The economy is growing about in line with potential, which suggests monetary policy will remain neutral.”

Stimulus, GDP

Peru’s government is implementing economic stimulus measures worth almost 2 percent of gross domestic product to offset slower global growth, Finance Minister Miguel Castilla said March 21.

President Ollanta Humala’s administration will also seek private investors to participate in $10.4 billion of infrastructure projects to be started this year and next, he said.

Public infrastructure spending, which shrank 18 percent in 2011, jumped a record 41 percent in the first quarter from a year earlier, the finance ministry said April 9.

GDP may expand 6 percent this year if an increase in business sentiment to a one-year high in February leads to stronger private investment, Castilla told Congress April 10.

Cement demand rose almost 20 percent in March, indicating construction activity is recovering, he said.

Policy makers in their quarterly inflation report published March 23 increased their GDP forecast to 5.7 percent from 5.5 percent previously. GDP rose 6.9 percent in 2011.

Inflation, Target Range

The report also forecast a 2 percent to 3 percent increase in consumer prices this year before moderating to 1.5 percent to 2.5 percent in 2013.

The central bank, which targets annual inflation of 1 percent to 3 percent, had said Feb. 9 that the pace of price increases would ease to 2 percent in 2012.

In March, prices climbed 0.77 percent from February and 4.2 percent from than a year earlier on higher fuel and food prices, the national statistics agency said April 1.

Inflation will probably decelerate more slowly than expected this year as political disputes from Iran to Sudan, which have helped push up the price of crude more than 7 percent in 10 weeks, continue to pressure supply, Perea said.

The yield on the country’s May 2015 sol-denominated bond have risen 22 basis points to 4.37 percent since central bank’s March 23 report prompted investors to rule out an expected cut in borrowing costs.

The Peruvian sol has gained 1.3 percent against the U.S. dollar this year. The currency was unchanged from yesterday at 2.6620 at 9:18 a.m. Lima time, according to Deutsche Bank’s local unit.

Trade, Rate Horizon

Still, a slowdown in exports is a sign that slower Chinese growth could hurt Peru’s $176 billion economy, said Juan Varilias, president of exporter group Adex.

Copper, zinc and lead shipments fell in February amid concern demand may ease in China, Peru’s top export market, he said in an April 10 e-mailed statement. Metals account for about two-thirds of Peru’s exports.

Exports rose at an annual rate of 9.7 percent in February after surging 31 percent in January, the national statistics agency said April 10. Import growth almost halved to 12 percent from 22 percent.

“Lowering the rate now would be a very aggressive move by the bank given the pace of domestic demand,” said Benito Berber, a strategist at Nomura Securities Inc. in New York. “If we head into a phase with a much weaker global economy, then the central bank’s next move would be a cut.”

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