Chile and Peru left their benchmark interest rates unchanged yesterday as policy makers weigh the impact of lower copper prices and the prospect of less global stimulus.
Chile’s central bank kept its key rate at 5 percent for the 18th consecutive month, while Peru held its benchmark rate at 4.25 percent for a 26th month, matching Malaysia for the longest pause in developing countries. Both decisions were expected by analysts surveyed by Bloomberg.
Declining copper prices have damped exports and crimped an investment boom that made the two countries among the fastest expanding economies in Latin America last year. Rising borrowing costs overseas amid speculation the Federal Reserve will taper economic stimulus may lead policy makers in Chile and Peru to ease monetary policy should slowdowns take hold, said Diego Donadio, a strategist at BNP Paribas SA.
“Chile’s domestic demand is really, really strong but inflation is pretty much well contained and manufacturing is suffering,” Donadio said by phone from Sao Paulo. “Peru is more likely to change reserve requirements than interest rates as growth is in line with potential.”
Chile’s inflation rate jumped to a seven-month high of 1.9 percent in June, while manufacturing fell at its fastest annual pace in more than three years the month before.
Copper, the largest export for both Chile and Peru, has fallen 13 percent in New York this year, deterring investment and damping growth.
While Chilean inflation remains below the 2 percent to 4 percent target range, growth has eased more than forecast, policy makers said in a report July 1, indicating they probably will cut interest rates later this year.
“The consolidation of the trends outlined in the last Monetary Policy Report could call for adjustments to the monetary policy interest rate in the coming months,” the central bank said in a statement accompanying yesterday’s decision. Minutes of the meeting will be published July 30.
Economists expect the key rate to fall half a percentage point within five months, according to a central bank survey released yesterday.
The Imacec index, a proxy for gross domestic product, grew 3.5 percent in May from the year earlier, below the 3.9 percent median forecast of economists. Manufacturing tumbled 4.2 percent over the same period, while a 13.2 percent jump in retail sales prevented the economy from slowing further.
In Peru, the Finance Ministry has also moved to head off any downturn in growth triggered by a drop in Chinese demand for copper and gold by announcing measures to bolster business sentiment and private investment.
Peru reported a $404 million trade deficit for May, the widest gap in at least seven years, the country’s statistics agency said July 10. The median estimate of five analysts in a Bloomberg survey was for a $250 million shortfall.
After raising reserve requirements five times since May 2012, the central bank set a 20 percent limit on the ratio for lenders’ sol deposits last month.
Peruvian policy makers in their statement that accompanied the rate decision also said that the bank will further relax reserve requirements if needed, after adjusting rules in May and June to spur lending in soles.
Peru’s economy expanded 7.7 percent in April, the fastest pace in two years, led by construction and retailing. On a seasonally adjusted basis, the economy expanded 5.4 percent in April, according to the central bank.
Annual inflation accelerated to 2.77 percent last month from 2.46 percent in May. The central bank targets inflation in a band of 2 percent plus or minus 1 percentage point.
“Inflation is in the target range, the economy is growing close to potential and credit growth is within the comfort zone,” Guillermo Arbe, the head of research at Scotiabank Peru, said by phone from Lima. “Peru isn’t in a situation where it needs to take drastic monetary policy decisions.”
Peru’s central bank forecasts 6.1 percent growth in gross domestic product this year after a 6.3 percent expansion last year, the fastest in South America.
Chile’s policy makers reduced their forecast for economic growth this year to between 4 percent and 5 percent from 4.5 percent to 5.5 percent on July 1.
“It’s a really tough environment for the central bank of Chile,” Donadio said. “If manufacturing sector is suffering, it’s probable the strong performance of the retail sales won’t last much longer.”