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Velarde Signals Peru Rates on Hold as Mining Spurs Rebound

Peru’s Central Bank President Julio Velarde
Peru’s Central Bank President Julio Velarde said, “Inflation is in line with our expectations and really we’re expecting the economy to accelerate.” Photographer: Susana Gonzalez/Bloomberg

Peru’s central bank President Julio Velarde signaled policy makers will leave interest rates on hold this month as the economy rebounds from its slowest growth since 2009.

The bank is “more optimistic” about the economy than it was three months ago when it cut rates for the first time in four years, Velarde said in an interview at his office in Lima yesterday. Increased mining output and rising consumer and business confidence as the government accelerates investment projects has put the economy “on a better footing,” he said.

Peru will increase copper shipments this year as Aluminum Corp of China Ltd. and Glencore Xstrata Plc open new mines, Velarde said, adding there’s no reason for the Peruvian sol to extend a recent decline. The central bank unexpectedly reduced its overnight rate Nov. 7 in response to falling copper and gold revenue and a moderation in retail sales and construction. The bank’s next rate decision is scheduled for Feb. 13.

“Inflation is in line with our expectations and really we’re expecting the economy to accelerate,” Velarde said. The monetary policy bias is almost neutral and policy makers would cut rates again if they saw a “very benign” inflation outlook, which isn’t the case now, he said.

The sol rose from a five-month low, advancing 0.1 percent to 2.822 per dollar at 10:15 a.m. in Lima, according to Datatec prices. The currency has weakened 0.8 percent this year after a 8.9 percent depreciation in 2013.

Market Fundamentals

“We don’t see why the sol should depreciate more,” Velarde said. “According to our model the exchange rate is where it should be based on the fundamentals.”

The bank sold $1 billion of U.S. dollars in the foreign exchange market last month to weaken the greenback, reducing supply of local currency by about 2.8 billion soles.

Velarde said the central bank on Jan. 31 lowered the reserve requirement ratio for sol deposits for a sixth time since August to prevent currency intervention from hampering credit growth.

The central bank has sold a record $6.2 billion since July, drawing on foreign reserves that have doubled to $66 billion in the past four years, to protect borrowers in an economy where 41 percent of loans are in dollars. Velarde projects the ratio will fall to about 30 percent by 2016, spurred by reserve requirements favoring sol loans over dollars.

“Thirty percent is still high. Fifteen or 20 percent would be ideal but I don’t know if we’ll achieve it. It may have to come later,” Velarde said. The bank probably will intervene less in the currency market as the ratio falls, he said.

Growth, Trade

Latin America’s sixth-largest economy expanded 4.4 percent in the third quarter, the slowest pace since 2009. Growth accelerated in the fourth quarter and will be “slightly” stronger again in the first three months of this year, Velarde said. The bank projects a 6.1 percent expansion for 2014.

Aluminium Corp. of China’s Toromocho copper mine will increase output in the second quarter, allowing Peru to report a trade surplus this year after a 2013 trade gap the central bank estimates at about $300 million. December’s trade surplus was an “exceptional” $480 million, Velarde said, adding he doesn’t expect the recent slide in copper prices to continue.

Velarde, 61, has led the central bank since 2006. As a board member from 1990 to 1992, he helped tame hyperinflation raging at 7,000 percent and introduce a new, floating currency, the sol.

Success Story

Peru’s inflation rate quickened to 3.07 percent last month from 2.86 percent in December. The annual rate will ease in March and slow to about 2 percent by year-end, Velarde said. The central bank targets inflation in a range of 1 percent to 3 percent.

Peru posted the fastest economic growth and slowest inflation in South America over the past decade as surging metal prices fueled mining investment. Gross domestic product rose an average 6.6 percent, while inflation averaged 2.93 percent, according to the International Monetary Fund.

Yields on the Andean nation’s sol-denominated bonds have surged in the past two weeks as concerns China’s economy is slowing fuels a rout in emerging-market assets.

The yield on the government’s notes due in 2023 rose eight basis points, or 0.08 percentage point, to 6.37 percent today, the highest since the bonds were issued in June 2012, according to prices compiled by Bloomberg.

Foreign investors, who held 52 percent of the government’s sol bonds as of Dec. 31, sold about 625 million soles of the debt last month as part of a withdrawal from emerging markets, Velarde said, adding he’s not concerned by the yield increase.

“Those who’ve sold are the ones that follow indexes so if they sell, they have to sell Peru,” he said. “It’s not fear about the country’s fundamentals. It’s a country with attractive fundamentals.”

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