Peru Central Bank Open to Rate Cut as Economy Decelerates

May 22 (Bloomberg) -- Peruvian policy makers are open to cutting their benchmark interest rate if an economic slowdown takes hold in the Andean nation, central bank President Julio Velarde said.

The central bank board may lower this year’s growth forecast after the economy expanded in March at the slowest pace since October 2009, Velarde said.

“There is a deceleration,” Velarde told reporters in Lima today. “If we see a considerable deceleration, we could reduce the interest rate.”

Peru’s central bank has kept its benchmark lending rate at 4.25 percent for two years, matching Malaysia for the longest pause in developing countries. Weak global demand and a drop in metal prices are hurting Peru’s economy while local business sentiment is falling as about $10 billion of investment is delayed by red tape, Velarde said.

Gross domestic product rose 4.8 percent in the first quarter from the year earlier, the slowest pace in more than three years, according to the median estimate of 13 analysts polled by Bloomberg. The statistics agency will release the first-quarter report tomorrow. In March, economic activity expanded 3 percent from a year ago.

The sol dropped 0.8 percent to 2.6680 per U.S. dollar at today’s close, the weakest level in 11 months, according to prices from Datatec. The currency is down 4.3 percent this year.

‘Investment Side’

Policy makers expect economic activity to rise by slightly more than 7 percent in April while indicators for May so far are mixed, he said.

The bank’s current estimate is for GDP to climb 6.3 percent this year after expanding an average 6.5 percent in the past decade. Business sentiment slid to an eight-month low last month, according to the central bank.

“The problem is not so much on the consumption side at the moment, it’s on the investment side,” Velarde said. “Confidence is something the government will have to address one way or another if it keeps deteriorating.”

The yield on the nation’s benchmark 7.84 percent sol bond due August 2020 climbed three basis points, or 0.03 percentage point, to 3.88 percent, according to data compiled by Bloomberg. The price fell 0.25 centimo to 124.56 centimos per sol.

Domestic demand remains strong and will probably keep Peru’s annual inflation rate at around 2.5 percent this year, said Pedro Tuesta, a Washington-based economist at 4Cast Inc. The bank will have leeway to cut rates should inflation slow to around 2 percent, he said in a phone interview.

“If you see consumption starts to come down quickly, any inflationary pressures are going to disappear,” Tuesta said.

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net