Peru Keeps 4.25% Rate as CPI Slows Amid Stable Growth

Peru kept borrowing costs unchanged for a 22nd consecutive month as policy makers expect inflation to converge to the mid-point of their target and economic growth to exceed 6 percent.

The five-member board, led by bank President Julio Velarde, yesterday maintained the overnight rate at 4.25 percent, the lowest in Latin America after Colombia and Mexico, matching the forecasts of all 14 economists surveyed by Bloomberg.

“Inflation continues to reflect the reversal of supply-side shocks and economic growth close to its potential,” the bank said in a statement accompanying its decision.

Peruvian consumer prices surprised economists by dropping 0.09 percent last month as food costs fell, pushing annual inflation down to a two-year low of 2.45 percent. While slowing inflation gives the bank room to consider cutting rates after the economy slowed in the fourth quarter, domestic demand remains too strong, said Francisco Rodriguez, a senior Andean economist at Bank of America Corp.

“We had a weak December but it’s not the type of deceleration that policy makers would have to see in order to change the monetary policy stance,” Rodriguez said in a telephone interview from New York before the decision.

Import Prices

Any decision by policy makers to cut rates will depend on the outlook for inflation and its determinants, the bank’s research director Adrian Armas told reporters on a conference call today. The annual inflation rate will probably slow to 2 percent in March or April as economic growth isn’t creating demand-led inflationary pressures while import prices are showing moderation, he said.

Even as Brazilian policy makers grapple with rising prices in Latin America’s biggest economy, slowing inflation is giving other central banks in Latin America leeway to stimulate growth amid weak demand in developed economies.

Mexico’s central bank unexpectedly cut borrowing costs today for the first time since 2009, reducing its key rate to 4 percent, while Colombia’s monetary authority has lowered its benchmark by 1.5 percentage points to 3.75 percent since June.

Peruvian economic activity expanded 4.3 percent in December, the slowest pace in three years, on a dip in construction, a mainstay of the $200 billion economy. The economy may post growth as much as 7 percent for January, Armas said.

Growth of gross domestic product in 2013 will probably match last year’s 6.3 percent expansion, which was the fastest in South America, according to Banco de Credito del Peru.

Demand Growth

“There are no signs of demand cooling,” said Juan Carlos Odar, a senior analyst at the Lima-based bank, the country’s largest. “Domestic demand is growing faster than GDP, so there’s no need to move rates.”

The yield on Peru’s benchmark 7.84 percent sol-denominated bond due August 2020 has fallen 9 basis points, or 0.09 percentage point, to 3.79 percent this year after dropping 1.87 percentage points in 2012.

The sol had the biggest two-month decline to start a year since 2009 after the central bank raised dollar reserve requirements three times since Jan. 1 and stepped up purchases of U.S. currency.

The currency has declined 1.7 percent this year after the central bank bought $3.4 billion in dollars, double what it purchased in the last two months of 2012. The Finance Ministry has pledged to buy at least $4 billion in 2013 to soak up surplus greenbacks.

The sol appreciated 5.7 percent in 2012 amid a surge in foreign direct investment to a record $12.2 billion and demand for local government bonds.

‘Room to Act’

The central bank has bolstered a drive to curtail demand for car loans and mortgages in dollars after six increases in reserve requirements for soles last year damped demand for credit in local currency.

While total lending to companies and households rose 14.2 percent in January, the slowest annual pace since 2010, demand for car loans, credit card borrowing and mortgages in dollars climbed at rates as high as 39 percent, the central bank said in a March 5 report.

The greenback accounted for 43 percent of all loans in the country in January and 37 percent of all deposits.

Policy makers will extend their interest-rate pause, the longest since the bank began targeting inflation in 2002, as they monitor the effects of recession in Europe and budget cuts in the U.S., the main destination for Peru’s exports, said Bank of America Corp.’s Rodriguez.

By flagging the possibility of a cut, policy makers “are saying ‘we’ve got inflation in the target band so we’ve got room to act in whatever direction is necessary’ in terms of monetary policy, he said.