Peru Likely to Keep Rates Unchanged After Damping Credit Growth

Central Bank of Peru President Julio Velarde
Julio Velarde, president of the central bank of Peru. Photographer: Jonathan Fickies/Bloomberg

Peru’s central bank probably will keep borrowing costs unchanged for the 16th consecutive month today after taking steps to cool credit growth in an economy that has withstood a drop in demand for its exports.

The five-member board, led by bank President Julio Velarde, will maintain the overnight rate at 4.25 percent, according to 17 of 18 economists surveyed by Bloomberg. One analyst forecast a quarter-point increase to 4.50 percent. The decision will be announced at 6 p.m. in Lima.

Policy makers will keep their overnight rate in neutral territory on concern the global slowdown may deepen, while they use reserve requirements to tighten money supply, said Alonso Segura, the head of strategy and investment at Banco de Credito del Peru. Economic activity rose at the fastest pace in 10 months in June fueled by a construction boom.

“An uncertain outlook for global growth makes it difficult for the bank to raise rates,” Segura said by phone from Lima. “They’re going to remain in wait-and-see mode.”

In contrast to Brazil and Colombia, where central banks have cut rates to bolster growth and employment, Peruvian policy makers are seeking to keep a lid on credit demand as economic growth and inflation accelerate.

The central bank lifted 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 raised the average reserve ratio by 0.5 percentage point, following a similar rise May 1. Lenders’ average ratio in June was 16 percent for soles and 40 percent for dollars.

Sol Strength

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.

The sol’s 4.5 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 2.6070 per dollar Sept. 4, the strongest level since 1997, data from the country’s financial regulator show.

Total outstanding bank loans rose 16 percent to 163 billion soles ($62.4 billion) in July from a year earlier, the fastest pace in three months, as the unemployment rate slid to 6.2 percent in Lima, the lowest since at least 2001.

Economic Growth

Economic activity probably rose 7 percent in July and should expand about 6 percent this year and next as mining and energy investment surges and the government boosts infrastructure spending, Finance Minister Miguel Castilla told Congress Sept. 4.

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.

Peru is the world’s third largest copper and zinc producer and sixth biggest in gold. The price of copper is down 13 percent in the past 12 months and has gained 2.6 percent this year, while gold has fallen 9.7 percent and gained 8 percent over the same periods.

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.

Inflation Risks

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 median estimate of 12 analysts in a Bloomberg survey was for an increase of 0.4 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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