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Peru Keeps 4.25% Rate on Economic Balance and CIP Outlook

Peru’s central bank kept borrowing costs unchanged for the 17th consecutive month as it sees the economy growing near its potential and inflation converging toward policy makers’ target.

The five-member board, led by bank President Julio Velarde, yesterday kept the overnight rate at 4.25 percent, matching the forecasts of 16 economists surveyed by Bloomberg.

Policy makers increased reserve requirements Oct. 1 for a second straight month as consumer demand fuels credit growth and investors move money into South America’s fastest growing economy. The bank expressed confidence that prices will ease in the context of growth that had stabilized near “sustainable levels” even after inflation accelerated for a fourth month in September and doubts about the global economy remain.

“Despite these factors, inflation is expected to gradually return to the target range in the coming months,” policy makers said, according to a statement posted on the bank’s website. The bank’s board attributed the faster-than-targeted inflation to temporary supply factors.

The central bank increased the average reserve requirement by 0.5 percentage point for local and foreign currencies this month, after a similar increase in September. Banks’ average ratio was 16.2 percent for soles in August and 39.5 percent for dollars.

Target, Trend

Peru’s inflation rate, which was running at 3.74 percent through September, will slow to within the bank’s target range of 1 percent to 3 percent “within coming months” as international grain prices fall and local harvests improve, central bank research director Adrian Armas said.

“We’re seeing improved global supply of products like wheat, soybean and corn,” Armas said on a conference call with reporters today. “Harvests in Peru were also better in October, which should lead to a substantial reduction in inflation.”

The bank is tightening money supply after credit growth expanded 17 percent in August, the strongest pace in five months, amid rising consumer demand and private investment.

The $176 billion economy expanded 7.2 percent in July, the fastest pace in 11 months, as construction activity surged. The government is rolling out an infrastructure-heavy fiscal stimulus package equivalent to 2.5 percent of gross domestic product to offset falling exports.

Trade, Growth

Shipments overseas dropped 20 percent to $3.71 billion in August from the same month of 2011, the steepest decline this year, as copper, gold and coffee prices fell, Peru’s national statistics agency said yesterday.

Imports rose 9.3 percent to a record $3.66 billion, led by capital goods for the mining and energy industry, fuel, televisions and cars. Metals account for almost two thirds of the nation’s exports.

Peru will be South America’s fastest growing economy in 2012 and 2013, expanding 6 percent and 5.8 percent respectively, according to the International Monetary Fund.

The Washington-based lender cut its global growth forecasts Oct. 9 and warned of “alarmingly high” risks of a steeper slowdown as the euro area’s debt crisis escalates.

Inflation, Global Risk

Peru’s consumer prices rose 0.54 percent in September, the fastest pace in six months, the statistics agency said Oct. 1. The increase pushed the annual inflation rate up for a second straight month.

Though last month’s price increases were a bit higher than the central bank was expecting, the annual rate will slow to 3 percent by the end of December, Velarde told reporters Oct. 3. Consumer prices will rise 0.1 percent a month in the current quarter, he said.

“The central bank uses its benchmark rate to manage inflation and that’s calculated to end the year within the target range. There’s no need to use this tool,” said Carlos Montalvan, chief executive officer at Interfondos SAF, the country’s fourth-largest mutual fund manager, in an Oct. 4 interview. “There’s still a small possibility that Europe will fall over, so it’s better for the bank to keep the rate at 4.25 percent and have margin to lower it quickly than to use it today and be left without bullets.”

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