Peru Likely to Keep 4.25% Rate as Prices Ease and Economy Booms

Peru Likely to Keep 4.25% Rate as Prices Ease and Economy Booms
While falling commodity prices are cutting into export revenue, they also are taking pressure off inflation rates that have declined in the past two months. Photographer: Dado Galdieri/Bloomberg

Peru’s policy makers will probably leave the benchmark interest rate unchanged for a 15th consecutive month today as inflation slows and economic growth outperforms regional peers.

The central bank will maintain the key rate at 4.25 percent, according to all 15 economists surveyed by Bloomberg. The board, led by bank President Julio Velarde, will announce its decision at about 6 p.m. in Lima.

The Andean nation is on track to lead South America’s economic expansion this year, while registering one of the region’s lowest inflation rates. Unlike Brazil and Colombia, where growth has lost momentum and policy makers have cut rates, Peru’s economy has proved more resilient, leaving policy makers under little pressure to stimulate demand.

“The central bank has no motive to impose expansive policy,” Jorge Gonzalez Izquierdo, head of the economics faculty at Lima’s Pacifico University, said by phone on Aug. 7. “Inflation is under control, gross domestic product is increasing at its expected potential and bank lending is growing.”

Peru’s economy grew 6.5 percent in May from the same month last year following a 4.4 percent expansion in April and 6 percent gain in the first quarter, the statistics agency reported on July 15. Its GDP will climb 5.7 percent in 2012, surpassing all other South American nations and the Latin American average of 3.7 percent, the United Nations’ economic unit for the region said in June.

Regional Growth

Brazil’s economy will expand 2.7 percent this year, according to UN forecasts, while Colombia’s central bank last month lowered its 2012 growth forecast to a range of 3 percent to 5 percent from 4 percent to 6 percent. The two countries’ central banks cut interest rates at their last meetings.

Like Peru’s policy makers, Chilean central bankers have kept borrowing costs unchanged as inflation slows and economic growth remained above the regional average at 6.2 percent in June. Chile will keep its key rate unchanged at 5 percent at next week’s meeting, according to all seven analysts surveyed by Bloomberg.

“Two countries that continue growing at notable rates in terms of external trade are Peru and Chile,” Banco Central de Chile President Rodrigo Vergara said in Santiago Aug. 7. “Both countries have growing export markets in China and Asia in general. You can say in general, the Pacific is doing well and the Atlantic has more problems.”

Signs of Slowing

Still, Peru and Chile are starting to show signs of contagion from China’s slowdown and Europe’s debt crisis.

Chile in July unexpectedly posted its second trade deficit of 2012 on slowing exports, while Peru in May had its biggest shortfall since 2008 on waning demand for copper and gold. Chile and Peru are the world’s first- and third-largest copper producers respectively. The metal has declined 13 percent in the past six months on the Comex exchange in New York.

Falling commodity prices also took pressure off inflation rates that have declined in the past two months, though that affect may coming to an end.

While Bloomberg’s commodity index, which includes energy, grain, food and precious metals and livestock, has declined 5.8 percent in the past year, it has risen 6.1 percent since the start of June as a drought in the U.S. pushes up grain prices.

Peruvian annual inflation eased to 3.28 percent in July from 4 percent the previous month and 4.14 percent in May. While Velarde last month said that inflation probably would drop below the upper limit of the bank’s 1 percent to 3 percent target in 2012, this week he expressed concern that rising global grain prices would pressure consumer prices.

“Since June, global prices of wheat, corn and soybean started rising as a result of a supply shock,” Gonzalez, a former labor minister, said. “The central bank shouldn’t respond to this as long as it doesn’t change long-term inflation expectations, which the bank still estimates at 2 percent.”

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