Peru doesn’t need to resort to capital controls to curb the sol’s appreciation amid strong demand for the country’s bonds, central bank President Julio Velarde, said today.
“I’ve never thought about capital controls. I don’t see them as necessary now,” Velarde told reporters in Lima today.
Though the differential between the bank’s benchmark lending rate and record low borrowing costs in Europe, Japan and the U.S. isn’t the main reason why investors are buying Peruvian government bonds, Velarde said he “wouldn’t rule out” a rate cut now that inflation is under control. Inflation will be “low” this month and will slow to policy makers’ 2 percent target this year, he said.
Peruvian companies seeking dollar financing abroad, demand for the government’s local currency bonds, and record foreign investment spurred the sol to a 16-year high of 2.5375 per U.S. dollar on Jan. 14. The central bank bought a record $13.9 billion in the spot market last year to tame the sol’s rally and last week raised the ceiling on local pension funds’ investments abroad to bolster demand for dollars.
Overseas bond issues by El Fondo Mivivienda SA, Peru’s state mortgage lender, and Corporacion Financiera de Desarollo SA, the state development bank, will add to dollar inflows, Velarde said. The issues go in the opposite direction of the Finance Ministry, which plans to prepay dollar debt to soak up some of the greenbacks in the local market, he said.
The sol weakened 0.2 percent to 2.5590 at today’s close, and declined 0.3 percent this week, according to prices compiled by Bloomberg.
The central bank’s increased intervention in the spot market makes investors less likely to bet against the dollar in the short term, said Gonzalo Navarro, the head trader at Banco Santander Peru SA, in an e-mailed response to questions. The outlook for the sol’s long term is for more appreciation, he said.
The monetary authority bought $950 million last week, the most since January 2008.