Peru Keeps 4.25% Rate on CPI Outlook Amid Near Potential Growth

Peru’s central bank kept borrowing costs unchanged for a 24th straight month as policy makers expect inflation to converge to the mid-point of their target amid near-potential economic growth.

The five-member board, led by bank President Julio Velarde, yesterday maintained the overnight rate at 4.25 percent, matching the forecast of all 15 economists surveyed by Bloomberg.

“The decision was due to inflation remaining within the target range in a context of economic growth near its potential,” policy makers said, according to their statement posted on the central bank’s website. Policy makers said they expect “a convergence of inflation toward the middle of the target range due to improved food supply.”

The central bank probably will keep interest rates unchanged for the rest of 2013, preferring to use reserve requirements to curb demand for credit without strengthening Peru’s sol, said Juan Carlos Odar, a senior analyst at Banco de Credito del Peru in Lima. Economists surveyed by Bloomberg forecast that the economy will expand 6.15 percent in 2013, after growing 6.3 percent last year.

After last month’s meeting, policy makers said they had kept the overnight rate unchanged because of “the fact that inflation is within the target range in a context of economic growth close its potential.”

Mining, Investment

Consumer prices rose 0.25 percent last month after a 0.91 percent jump in March, the biggest in five years. The annual pace slowed to 2.31 percent from 2.59 percent. The central bank targets inflation in a range of 1 percent to 3 percent.

Slowing inflation comes at the same time that lower metal prices threaten to damp investment in the mining industry, further easing pressure to raise rates.

Reduced Chinese demand for copper, Peru’s top export, fueled the sol’s biggest quarterly decline since 2008 in the first three months of the year and made the country’s stock market the world’s third-worst performer. Peru is the world’s third-largest producer of copper and zinc, and is the sixth-largest gold producer. Commodities account for about 75 percent of exports.

Copper prices are down 8.5 percent this year while gold has retreated 13.2 percent. After appreciating in each of the last four years, the sol has declined 1.9 percent against the U.S. dollar in 2013, the eighth-worst performance among 24 emerging market currencies tracked by Bloomberg worldwide.

‘Growth Trend’

Even as metal prices decline, economists in the central bank’s latest survey forecast that gross domestic product will expand 6.3 percent this year and 6.4 percent in 2014.

“There was an overreaction in the markets” to the decline in commodity prices, said Hugo Perea, chief economist at BBVA Banco Continental, by phone from Lima. “Business confidence is going to be a key support for growth. We don’t see any change in the underlying growth trend.”

Four fewer working days in the first quarter compared with the same period a year ago are masking a stable trend in growth, said Perea. GDP will grow almost 6 percent in the first half of 2013, Finance Minister Miguel Castilla told Congress May 3.

The yield on Peru’s benchmark 7.84 percent sol-denominated bond due August 2020 has fallen five basis points, or 0.05 percentage point, to 3.86 percent this year. The Lima General Index is down 13.7 percent in local currency terms.

Weakness in the sol will ease pressure on the central bank to take additional measures to cool the currency after a surge in inflows in 2012 led policy makers to increase dollar reserve requirements this year.

Tighter dollar supply is crimping credit growth, which slowed to 14.3 percent in March, the slowest since 2010, according to the central bank’s website. Banco Central de Reserva del Peru trimmed reserve requirements effective May 1 to encourage long term financing in soles.

Five increases in reserve requirements in soles in the past two years have allowed the central bank to leave rates unchanged.

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