Peru Unexpectedly Raises Key Rate as Sol Fuels Price Rises

  • Currency weakness, inflation pushed central bank to raise
  • Intervention, trading curbs haven't stopped sol decline

Peru unexpectedly increased borrowing costs for the first time in four years as a slide in the sol fans the fastest inflation since 2012.

The central bank board, led by bank President Julio Velarde, raised its key lending rate to 3.5 percent from 3.25 percent, surprising 14 of 17 economists surveyed by Bloomberg who expected no change. Three analysts forecast the quarter-point increase.

In a statement accompanying the decision, the board said inflation has been affected by transitory factors such as food prices and currency depreciation. The change leaves the real interest rate at 0.5 percent, which is in line with a expansive monetary stance, it said.

The board is “ready to consider additional changes to the benchmark rate that bring inflation to the target range,” the statement said, adding Thursday’s move isn’t the start of a tightening cycle.

The sol has weakened 11 percent against the dollar in the past year, pushing up import and dollar-debt servicing costs, even as the central bank sold $6.9 billion of dollar reserves to slow the pace of depreciation. A pick-up in growth may also add to pressure on prices. The economy expanded 3 percent in the second quarter from the year earlier, the fastest pace since the first three months of 2014.

Currency Pressure

“After two years of currency pressures, we’re starting to see more clearly second-round effects on prices,” said Mario Guerrero, an economist at Scotiabank Peru. “A good part of company expenses are denominated in dollars, which puts pressure on final prices.”

The central bank and the banking superintendency tightened curbs on trading in the forwards market last month as bets against the sol pushed the currency to its weakest level since 2006.

Economist expectations for inflation in 2016 rose to 3 percent last month, the upper limit of policy makers’ target range, from 2.9 percent in July, according the central bank’s monthly survey. Analysts also trimmed their growth forecasts for 2015 and 2016 for a second consecutive month.

Economic growth will accelerate in the second half of 2015 and expand at a rate that is close to potential in 2016, the central bank’s statement said.

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