Peru Likely to Keep 4.25% Rate Amid Drive to Slow Sol’s Rally

Peru’s central bank probably will keep borrowing costs unchanged today for a 20th consecutive month after increasing efforts to slow credit growth and tame a rally in the sol.

The five-member board, led by bank President Julio Velarde, will maintain the overnight rate at 4.25 percent, the joint lowest in Latin America with Colombia, according to all 14 economists surveyed by Bloomberg. The decision will be announced at about 6 p.m. in Lima.

Policy makers this month raised reserve requirements for the fifth time since May as part of efforts to rein in lending and help soak up inflows that pushed the sol to its strongest level in 16 years. The pace of credit growth in South America’s fastest-growing economy risks reviving inflation that slowed to an 18-month low in December, said Hugo Perea, the chief economist at Banco Continental SA.

“There’s been some deceleration in credit but the central bank may want to induce a soft landing toward more appropriate levels,” Perea said in a phone interview from Lima. “We can’t rule out another increase in reserve requirements. Raising the benchmark rate might encourage bigger capital inflows.”

Peruvian lenders and companies are tapping overseas markets for financing to take advantage of record low borrowing costs, fueling dollar inflows and a strengthening of the sol.

The sol gained 5.4 percent last year, the best annual performance since 2009, even after the central bank purchased a record $13.9 billion in the spot market to soak up excess greenbacks. The currency touched 2.5411 per U.S. dollar on Jan. 7, the strongest since October 1996.

Inflows, Growth

Foreign direct investment, the biggest source of dollar inflows, probably rose to a record $11.1 billion last year, while non-residents purchased $2.42 billion of Peruvian securities after being net sellers in 2011, the central bank said in a Dec. 14 report.

Companies likely issued $1.9 billion bonds abroad in 2012 after selling none in 2011, the report showed.

The yield on Peru’s benchmark 7.84 percent sol-denominated bond due August 2020 fell 1.87 percentage points to 3.88 percent last year and has rallied further to 3.80 percent in 2013. The Lima General Index rose 5.9 percent in 2012 and has gained 4.7 percent already in 2013.

“Peru is growing at a faster pace than everyone else so the currency has to appreciate,” said Pedro Tuesta, an economist at 4Cast Inc., in a phone interview from Washington. “There’s no way to avoid that.”

Construction is booming in the Andean nation amid investment in mines, power plants, infrastructure and homes. Economic activity grew 6.7 percent in November from the year earlier after a 5.9 percent increase in September, exceeding the estimates of economists and the central bank.

Credit, Mortgages

Policy makers increased the reserve ratio by 0.75 percentage point for dollar deposits and 0.25 percentage point for soles, effective Jan. 1.

Banks held an average 17.8 percent of their sol deposits and 40 percent of their dollar deposits at the central bank in October, according to the central bank.

Dollar credit increased 16.6 percent to $28.3 billion in November, the fastest pace in eight months, and accounted for 43.4 percent of all outstanding loans to companies and households, the central bank said in a Dec. 28 report. Sol loans grew 16.6 percent, the slowest since May.

The country’s banking regulator in November told lenders to set aside more funds against potential losses on mortgages and car loans after delinquency rates rose to a two-year high of 1.79 percent in October.

No ‘Urgency’

Still concern that the global economic outlook could deteriorate has led policy makers to keep rates unchanged for the longest period since Peru’s central bank began targeting inflation in 2002.

Exports in November rose 13.2 percent to $3.7 billion from the same month a year earlier, the national statistics institute reported yesterday.

Consumer prices rose 0.26 percent last month while the annual inflation rate last month slid to 2.65 percent from 2.66 percent in November and 3.25 percent the previous month. Inflation will slow to about 2 percent this year, the mid-point of the central bank’s 1 percent to 3 percent target range, the bank said Dec. 14.

The central bank can maintain a neutral stance this year as investment-driven growth shouldn’t stoke consumer prices, Tuesta said.

“Inflation isn’t running away from the band and GDP is near potential,” Tuesta said. “They don’t have any urgency to hike.”

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