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Peruvian Sol Rises Most in 10 Months After Unexpected Rate Pause

Aug. 8 (Bloomberg) -- Peru’s currency rallied after the central bank unexpectedly kept borrowing costs unchanged yesterday on the prospect of growth rebounding and as inflation eases more slowly than expected.

The sol strengthened 0.7 percent to 2.794 per U.S. dollar at the close of trading in Lima, the most since Sept. 18, according to Datatec prices. That’s the steepest increase among the five-most traded currencies in Latin America.

Peru held the overnight rate at 3.75 percent yesterday, surprising 12 of 18 economists surveyed by Bloomberg who forecast a quarter-point cut to 3.50 percent. Six analysts expected no change. At the same time, policy makers lowered the reserve requirement ratio for soles to 11 percent from 11.5 percent. Rates will stay on hold for the rest of this year, said Francisco Rodriguez, an economist at Bank of America Corp.

Lowering reserve requirements “suggests that the central bank board considered these policy measures today as alternatives to address the economy’s deceleration,” wrote Rodriguez in an e-mailed note to clients. Inflationary pressures “limit its ability to further loosen policy,” he said.

Rodriguez had expected the bank to lower the key rate by a quarter-point yesterday and previously forecast a similar reduction next month.

The central bank unexpectedly cut the rate by a quarter-point last month after the economy lost momentum in the first half of 2014 amid an export slump. The move fueled a 0.9 percent loss in the sol in the four weeks before yesterday’s meeting.

Boosting Growth

Public sector pay increases and tax incentives to spur the construction industry will help fuel a recovery in the fourth quarter of this year, Finance Minister Miguel Castilla told reporters July 28.

“The fiscal impulse is going to be very strong,” said Alfredo Thorne, the founder of Thorne & Associates, a Lima-based research and investment advisory firm who expected the central bank to keep rates unchanged yesterday. “The increase in public sector wages will add to consumption.”

The country’s sol-denominated notes due in 2020 dropped 0.39 centimo to 115.61 centimos per sol, according to prices compiled by Bloomberg. The yield rose seven basis points, or 0.07 percentage point, to 4.80 percent.

Policy makers have moved to shore up business sentiment as slowing Chinese growth damps mining investment in Peru, the world’s third-largest copper producer.

Growth Horizon

Public and private investment growth probably slowed close to zero in the first half of this year amid declining revenue from copper and gold, the central bank said in a July 18 report.

Peru’s $200 billion economy expanded 1.8 percent in May, the weakest annual pace since 2009, as mining, fishing and manufacturing contracted. Exports fell 12 percent in the first five months of 2014, extending last year’s 9.4 percent slide.

While June was “a very bad month,” growth appears to have strengthened in July and is likely to continue accelerating, central bank President Julio Velarde told reporters in Lima yesterday.

“Apparently the lowest point for economic activity was June and in part because of primary sectors,” Velarde said. He reiterated the bank’s forecast for growth of close to 6 percent in 2015 as mining, fishing and agriculture output rebounds.

Peru’s statistics agency will report activity for June on Aug. 15.

Export Outlook

Policy makers haven’t cut at two consecutive meetings since the third quarter of 2009 when the economy was in the middle of a recession. Neighboring Chile has lowered rates 75 basis points this year while Mexico cut by 50 basis points at its June meeting.

Economic growth falling to zero would prompt Peru to cut again and that isn’t in the cards, Thorne said. The prospect of rising U.S. interest rates also justifies the bank’s decision to pause this month, he said.

Fiscal stimulus, rising output from Chinalco Mining Corp. International’s new copper mine, and the start of construction on infrastructure projects including the Lima subway will fuel a recovery, said Thorne.

“We have a much better global scenario for the second half, which paves the way for exports to recover,” said Roberto Flores, the head of research at Inteligo SAB, by phone from Lima.

The central bank’s easing of the reserve requirement ratio since June 2013 has freed up 9.5 billion soles to boost lending in local currency, the bank said yesterday. It previously lowered the ratio July 1.

Outstanding bank loans rose at an annual pace of 15 percent in June compared with 13 percent in December.

‘More Cautious’

Slower economic growth has hurt demand for big-ticket consumer goods, such as cars. Jose Molina, head of sales at Motormundo, a car showroom on the edge of Lima’s financial district that caters to the city’s emerging middle class, said sales of even the least expensive models are falling short of projections.

“People are being much more cautious and are looking for bargains,” Molina said. “There’ll be a rebound in the second half.”

Consumer prices rose 0.43 percent last month while the annual inflation rate was 3.33 percent, the slowest in six months. The central bank targets inflation in a range of 1 percent to 3 percent.

In its comuniqué yesterday, the bank said supply-side inflationary pressures are moderating more slowly than expected.

Inflation may return to the target range this month and is likely to remain close to 3 percent in “the coming months,” Adrian Armas, central bank research director, told reporters during a conference call today.

The bias on monetary policy is for further easing, depending on future economic data, Armas said. The economy is forecast to recover gradually and will be closer to its potential growth rate by the first quarter of 2015, he said.

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

To contact the editors responsible for this story: Andre Soliani at asoliani@bloomberg.net Robert Jameson, Philip Sanders

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