Peru Keeps 4.25% Rate on Domestic Growth Amid Global Weakness

Peru kept borrowing costs unchanged for a 20th consecutive month as policy makers said their decision reflects slowing inflation, stable economic growth and a “complicated” external situation

The five-member board, led by bank President Julio Velarde, yesterday held the overnight rate at 4.25 percent, the lowest in Latin America along with Colombia, matching the forecasts of all 15 economists surveyed by Bloomberg.

“Inflation is forecast to slow to 2 percent in 2013 due to better conditions for food supply and a pace of economic grow close to potential while global activity indicators remain weak,” the bank’s board said, according to a statement posted on the bank’s website.

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.

“If they want to avoid asset bubbles and excessive credit growth, they’re going to use reserve requirements and not the monetary policy rate,” Perea said in a phone interview from Lima. “The bias on the current rate policy stance, if any, is neutral.”

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.

Investment, Markets

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.

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 3.74 percent in 2013. The Lima General Index rose 5.9 percent in 2012 and has gained 6.2 percent already in 2013.

‘Has to Appreciate’

“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 October from the year earlier after a 5.9 percent increase in September, exceeding the estimates of economists and the central bank.

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.

‘Near Potential’ GDP

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 slid 0.9 percent to $41.5 billion in the first eleven months of 2012 from the same period a year earlier, exporters association Adex said Jan. 7. Exports in November rose 13.2 percent, the national statistics institute reported Jan. 9.

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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