Peru Keeps Rate Unchanged at 4.25% After Damping Credit Growth

Peru’s central bank bucked a regional trend and kept borrowing costs unchanged for the 16th consecutive month after taking steps to cool credit growth in South America’s fastest-growing economy.

While central banks in Brazil and Colombia cut rates last month, Peru’s five-member board led by bank President Julio Velarde yesterday maintained the overnight rate at 4.25 percent, matching the forecasts of 17 of 18 economists surveyed by Bloomberg. One analyst predicted a quarter-point increase to 4.50 percent.

In a statement accompanying the decision, policy makers cited a weaker global economy, domestic growth close to potential and a temporary deviation in inflation as reasons for the pause. Though international grain prices have risen and the local supply of some perishable foods has been disrupted, “a gradual convergence in inflation to the target range is expected in the remainder of the year,” the central bank said.

Policy makers used an increase in reserve requirements last week to tighten the money supply, said Alonso Segura, the head of strategy and investment at Banco de Credito del Peru.

“Growth is in line with potential and isn’t generating demand pressures while inflation stems from supply factors,” Segura said in a phone interview from Lima. “They need more time to evaluate what might happen with the global economy.”

Faster Inflation

Economic activity rose 7.1 percent in June, the fastest pace in 10 months, fueled by a construction boom, and held near that level in July, Finance Minister Miguel Castilla said Sept. 4.

The central bank raised the amount of reserves banks must set aside on Sept. 1 as it seeks to prevent near-zero borrowing costs abroad from feeding demand for credit in U.S. dollars. It lifted the average reserve ratio by 0.5 percentage point, following a similar move in May. Lenders’ average ratio in June was 16 percent for soles and 40 percent for dollars.

The common use of dollar deposits and loans in Peru make adjustments to the reserve requirements more effective than changes to the key interest rate in controlling demand, said Cesar Fuentes, vice-president of Popular SAFI, a Lima-based investment fund.

Outstanding consumer loans in dollars rose 21 percent in July from a year ago, while dollar mortgages jumped 24 percent, raising the economic risks from a sudden depreciation of the sol, Fuentes said.

Currency Rally

The sol’s 3.4 percent rally against the dollar this year makes it cheaper for borrowers with earnings in soles to pay back loans in U.S. currency. The sol touched 2.6075 per dollar Sept. 3, the strongest level since 1997, data from the country’s financial regulator show.

Total outstanding bank loans rose 16 percent to 163 billion soles ($62.5 billion) in July from a year earlier, the fastest pace in three months, as the unemployment rate in Lima slid to 6.2 percent, the lowest since at least 2001.

The government is rolling out an infrastructure-heavy stimulus program worth 2.5 percentage points of gross domestic product to offset the weaker global economy. Should metal prices fall and growth falter, the government stands ready to boost spending, drawing on a fiscal surplus it estimates at 1 percent of GDP next year, Castilla said.

Cement demand surged 23 percent in July from a year ago, while imports rose 24 percent, the national statistics agency said Sept. 1. At the same time exports contracted for a third straight month, dropping 22 percent on reduced metals, fishing and natural gas sales abroad.

Copper and Zinc

Peru is the world’s third largest copper and zinc producer and sixth biggest of gold. The price of copper is down 13 percent in the past 12 months and has gained 2.5 percent this year, while gold has fallen 9.2 percent and gained 8.5 percent over the same periods. Mining investment rose 21 percent in the first five months of the year, led by Newmont Mining Corp’s Minera Yanacocha unit and Xstrata Plc.

The central bank may opt to increase its benchmark rate by December should increases in international wheat and corn prices keep annual inflation near current levels, Fuentes said in a Sept. 4 interview in Lima.

Annual inflation accelerated to 3.53 percent last month from 3.28 percent in July on higher food and electricity costs, the national statistics agency said Sept. 1. Consumer prices climbed 0.51 percent in the month, the fastest pace since April. The central bank targets annual inflation of 2 percent plus or minus 1 percent.

“The bank’s holding at 4.25 percent because they’re probably expecting lower growth in China and Europe to reduce demand for commodities,” Fuentes said. “If Chinese growth holds steady and there isn’t a catastrophe in Europe, the bank will probably raise rates.”

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