Peru Keeps 4.25% Rate on Balanced Economy and Slowing CPI

Peru kept borrowing costs unchanged for the 18th consecutive month as policy makers said economic growth is near its potential and inflation is slowing to the mid-point of their target range.

The five-member board, led by bank President Julio Velarde, held the overnight rate at 4.25 percent yesterday, matching all 14 forecasts of economist surveyed by Bloomberg.

“Growth in the Peruvian economy has stabilized around its long-term sustainable level,” while the outlook for global growth remains “uncertain,” the central bank said in a statement on its website. October brought “a reversal of the supply shocks that had been affecting inflation temporarily, and with that inflation will return to the target range and trend gradually to 2 percent.”

The bank raised reserve requirements last week for a third straight month to slow credit growth in South America’s fastest growing economy and to curb the rally by 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.

“Capital inflows and the currency are their main concern in the short term,” said Mario Guerrero, an economist at Scotiabank Peru, in a telephone interview from Lima. “They would be comfortable with slower credit growth. Reserve requirements may be aimed at slowing consumer credit, which remains strong.”

The central bank targets an annual rate of 2 percent plus or minus 1 percent.

Reserves, Currency

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.

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.

The monetary authority is evaluating the development of credit and liquidity to determine whether a further increase in reserve requirements is needed, Adrian Armas, the bank’s research director, said during a conference call with reporters today.

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.

Investment, Trade

“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 depreciated 0.3 percent to 2.6130 per dollar at 12:59 p.m. in Lima, according to Deutsche Bank AG’s local unit. The currency touched 2.5770 on Oct. 22, the strongest since December 1996, according to data from the Superintendency for Banking, Insurance and Pension Fund Administrators.

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 on Nov. 7.

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 almost 16 percent in the past three year and traded at $3.4385 a pound on the Comex in New York.

Exports, Markets

The Andean nation posted a $403 million trade surplus in September, the widest in three months, Armas said.

Consumer and business confidence is rising, while investment growth will fuel a 6.2 percent rise in gross domestic product this year, he said.

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.

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 Lima Stock Exchange’s benchmark index has advanced 8.2 percent this year and the sol has appreciated 3.2 percent against the U.S. dollar. The extra yield investors demand to own Peruvian government dollar bonds instead of U.S. Treasuries has decreased 92 basis points to 124 basis points, according to JPMorgan Chase & Co.

Loan Growth

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.

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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