Peru Keeps 4.25% Rate While Signaling More Reserve Cuts Possible

Peru’s central bank kept borrowing costs unchanged for a 27th straight month while signaling it may continue reducing reserve requirements to counter slower growth.

The five-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent yesterday, matching the forecasts of all 13 economists surveyed by Bloomberg. Peru ties Malaysia for the longest interest-rate pause in developing countries.

“The decision reflects the fact that economic growth is close to potential and inflation expectations are anchored within the target range,” according to the board’s statement posted on the bank’s website. “The board, if necessary, will take additional steps to relax reserve requirements” after adjustments since April freed up 1 billion soles ($358 million) and $350 million in U.S. dollars to bolster lending, it said.

Policy makers lowered reserve requirements effective Aug. 1 after growth lagged behind economists’ estimates in five of the last six months due to a slump in metal exports. The central bank board has refrained from cutting interest rates as domestic demand is giving Peru the fastest economic growth among major Latin American countries, said Hedmond Rios, an economist at BTG Pactual in Santiago.

The central bank on Aug. 1 lowered the percentage of depositors’ balances in soles and dollars that commercial banks must have on hand as cash after credit expanded at the slowest pace since December 2009, and the sol fell to a two-year low.

‘Clear Signs’

The central bank began relaxing lenders’ reserve ratios in April after using the measures at least 36 times to tighten the supply of either soles or dollars between February 2010 and March this year.

“Clear signs of deceleration” leave the central bank “trapped in a dilemma of its own,” said Francisco Rodriguez, senior Andean economist at Bank of America Corp., in an e-mailed note to clients Aug. 6. The bank runs “the risk of losing credibility if it loosens monetary policy with both core and headline inflation out of the target band. For now, it will continue to hold the reference rate while possibly considering some further cuts in reserve requirements.”

Cutting reserve requirements has an immediate impact, unlike changes to the benchmark rate, and is designed to bolster demand, Velarde told reporters in Lima on July 24.

“Though consumption continues to be strong, there is a slight deceleration,” Velarde said. “We’re trying to offset that a little.”

Growth, Exports

Velarde reiterated the central bank’s 2013 economic growth forecast of 6.1 percent nine days after the government on July 15 reported that the economy expanded 5 percent in May, below the 5.5 percent median forecast of analysts in a Bloomberg survey.

Slower growth in China and Europe has damped prices for Peru’s copper and gold, which account for about half of the South American country’s exports. Copper has declined 11 percent in New York this year, and gold is down 22 percent.

Exports dropped 19 percent in June from a year earlier, and imports fell 1 percent, the national statistics agency said Aug. 1. Peru had a record trade deficit of $404 million in May. The agency reports June’s trade balance tomorrow.

Finance Minister Miguel Castilla pledged to speed up infrastructure investment and cut red tape after business sentiment plunged to its lowest in at least a year in June, according to the central bank.

Policy Limits

Cia. De Minas Buenaventura SAA, the country’s largest precious metals producer, said July 30 it will close three mines and scale back exploration.

Inretail Peru Corp., a Lima-based supermarket operator, will slow the pace of store openings this year after consumer demand slowed, Chief Financial Officer Augusto Rey told analysts during a July 31 conference call.

Lower metal prices caused income tax revenue to fall 3.5 percent in June, the tax agency said July 8. The decline was offset by a 5.4 percent rise in sales tax collections.

Construction and retail expansions will help mitigate the external weakness, and policy makers won’t cut borrowing costs unless they see clear signs of domestic demand slowing, said Pedro Tuesta, a Latin America economist at 4Cast Inc.

“Growth will be weaker than the central bank was anticipating,” Tuesta said in a phone interview from Washington. “The main reason is external demand for which the central bank can do nothing.”

Food, Inflation

Higher food prices in July pushed the annual inflation rate above the central bank’s target range of 1 percent to 3 percent for the first time in nine months.

Consumer prices rose 0.55 percent, driving annual inflation to 3.24 percent from 2.77 percent in June. Slower growth will put inflation back below 3 percent by year-end, BTG Pactual’s Rios said.

“Inflation is projected to return to the target range in the third quarter, due to the improvement in food supply conditions,” policy makers said in their statement.

The Lima General stock index has plunged 26 percent this year in local currency terms, the steepest decline among 94 primary indexes tracked by Bloomberg. The sol has weakened 8.5 percent over the same period.

The central bank sold dollars in the foreign exchange market last month for the first time since May 2012 to stem declines in the sol.

“The bank has a lot of room to reduce reserve requirements while it waits to see better growth figures,” Rios said in a phone interview before the bank’s decision.

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