Peru Probably Will Keep 4.25% Rate as Focus Turns to Curbing Sol

Peru’s central bank probably will keep borrowing costs unchanged for the 18th consecutive month today after taking steps to stem a rally in the sol and restrain credit demand.

The five-member board, led by bank President Julio Velarde, will maintain the overnight rate at 4.25 percent, according to all 14 economists surveyed by Bloomberg. The decision will be announced at about 6 p.m. in Lima.

The monetary authority increased reserve requirements last week for a third straight month to slow credit growth in South America’s fastest growing economy and to counter the appreciation of the sol, which touched a 15-year high against the dollar last month. The annual inflation rate fell to a 16-month low in October, allowing policy makers to focus on addressing inflows using macro-prudential measures.

“Inflation is no longer a concern and growth is stable,” said Mario Guerrero, an economist at Scotiabank Peru, in a telephone interview from Lima. “Capital inflows and the sol’s appreciation have the authorities worried and will be their focus in the months ahead.”

Record low borrowing costs in the U.S., the European Union and Japan have prompted Peruvian companies to turn to international bond markets and foreign banks for financing. Record foreign direct investment and demand for Peruvian government bonds have added to inflows.

Exchange Rate

The central bank increased the average reserve requirement for sol and dollar deposits by 0.75 percentage point on Oct. 30, the largest of the four increases this year. The average deposit ratio in September was 16.9 percent for soles and 38.9 percent for dollars, it said.

Policy makers have boosted reserves by buying a record $12.5 billion in the spot market this year and last month proposed tightening restrictions on banks’ sales of greenbacks to tame the sol. Limits on private pension fund investments overseas will probably be relaxed by year-end to boost demand for dollars, Velarde said in an Oct. 25 interview.

Swings in the currency can harm Peru’s economy, where 43.8 percent of all credit is denominated in dollars, while appreciation can lead to calls for protectionism, Velarde said.

“Peru is one of the few countries in Latin America where people are used to taking out loans in dollars, so that makes monetary policy a bit more difficult,” he said.

The sol weakened 0.3 percent to 2.6080 per dollar yesterday. The currency closed at 2.5780 on Oct. 17.

Investment, Trade, Prices

Private investment climbed 16 percent in the third quarter, fueling a 6.4 percent rise in gross domestic product, after a 6.1 percent rise in the first half, Finance Minister Miguel Castilla said at an event in Lima yesterday.

Though a weak global economy has hurt demand for Peru’s copper exports, there are signs of stronger growth in the U.S. and China, the nation’s biggest trading partners, Castilla said.

Peru, the world’s third-largest copper producer, will boost output 62 percent over the next two years as new mines start producing, Velarde said Sept. 28. Copper has gained 0.2 percent this year to $3.4415 a pound on the Comex in New York.

Exports declined 3.3 percent to $3.86 billion in September compared with the year earlier period, exporters association Adex said Nov. 6.

Tax collection increased 7.8 percent to 6.92 billion soles ($2.67 billion) in October from the same month a year earlier, led by increased sales tax revenue, tax and customs agency Sunat said Nov. 6.

Prices, Markets

Consumer prices last month fell the most since 2009, declining 0.16 percent largely because of lower food costs. The annual inflation rate fell to 3.25 percent from 3.74 percent in September. The central bank targets an annual rate of 2 percent plus or minus 1 percent. are unlikely to dent private investment, he said.

The Lima Stock Exchange’s benchmark index has advanced 7.3 percent this year and the sol has appreciated 3.5 percent against the U.S. dollar. The extra yield investors demand to own Peruvian government dollar bonds instead of U.S. Treasuries has decreased 99 basis points to 117 basis points, according to JPMorgan Chase & Co.

Increased reserve requirements will cause loan growth to slow in the fourth quarter of 2012, said Eduardo Torres-Llosa, chief executive officer of Banco Continental, the Peruvian unit of Banco Bilbao Vizcaya Argentaria SA, in an Oct. 31 interview.

Lending will increase 14 percent this year and 12 percent next year, after expanding 17 percent in 2011, he said.

‘Not Done Yet’

Banks are increasing provisions as a precautionary move amid rising loan delinquency rates and signs some consumers have taken on too much debt, Torres-Llosa said.

“The economy is doing well,” he said. “Slowing the pace of credit doesn’t hurt anyone.”

Policy makers are considering an increase in loan provisions to stem a rise in consumer borrowing in dollars, said Oscar Rivera, president of the country’s banking association, Asbanc. Lower interest rates on dollar loans and the sol’s appreciation are spurring demand for car and home loans in the U.S. currency, he said.

“Recent monetary policy measures are aimed at easing the pace of currency appreciation and slowing credit in a preventive way,” Guerrero said. “Probably they’ll keep on raising reserve requirements. They’re not done yet.”

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