Peru Likely to Keep 4.25% Rate on Outlook for Growth Recovery

Peru’s central bank probably will keep borrowing costs unchanged today for a 25th straight month on expectations that the economy will rebound from a first-quarter slowdown.

The five-member board, led by bank President Julio Velarde, will maintain the overnight rate at 4.25 percent, according to all 15 economists surveyed by Bloomberg, matching Malaysia for the longest pause in developing countries. The decision will be announced at about 6 p.m. Lima time.

The $199 billion economy expanded 4.8 percent in the first quarter, the slowest pace in more than three years, after metal and manufacturing exports plunged amid weaker global demand. Policy makers will keep rates on hold while they wait for confirmation that growth rebounded in the second quarter, said Juan Pablo Fuentes, an economist at Moody’s Analytics Inc.

“The slowdown is only temporary,” Fuentes said by phone from West Chester, Pennsylvania. “Monetary policy is expansive but not too expansive and that’s good for an economy that’s growing close to capacity.”

Robust domestic demand has prevented a sharper deceleration in the commodity-dependent economy, and will lead gross domestic product to rise 6.4 percent in the second quarter, Velarde said in Congress June 5.

Economic activity probably expanded 7.1 percent in April, more than twice March’s 3 percent pace, according to the median estimate of 11 economists in a Bloomberg survey. The statistics agency will report April activity tomorrow.

Growth Drivers

“Construction, services and retail have been the main drivers of growth in recent quarters and that’s going to continue,” said Fuentes.

After raising reserve requirements five times since May 2012, the central bank set a 20 percent limit on the ratio for lenders’ sol deposits from this month. In a June 6 interview, Velarde said the move was “slightly expansive” and was prompted by concern that the economy was slowing.

The move followed a deceleration in credit growth and government measures to bolster flagging business sentiment.

Bank lending rose 14 percent in April, the slowest pace for at least two years, as demand for dollar loans eased, according to the central bank.

Trade Gap

The fact there were two more working days in April 2013 than the year earlier will boost growth that month, giving policy makers more time to assess the risk of a potential slowdown, Jorge Pastrana, an economist at Citigroup Inc., wrote in a June 10 report.

Still, Pastrana said Banco Central de Reserva del Peru probably will reduce its key rate by 50 basis points, or 0.5 percentage point, to 3.75 percent this year. The timing depends on when the slowdown “becomes evident.”

Peru posted a $378 million trade deficit in April as metal exports declined, the national statistics agency said June 11. The median estimate of economists in a Bloomberg survey was for a deficit of $301 million. The central bank last week cut its forecast for 2013 trade surplus by 83 percent to $485 million.

Copper prices are down 12 percent this year while gold has retreated 17 percent. The metals account for half Peru’s exports.

The Lima General stock index has plunged 24 percent this year in local currency terms, the steepest decline among 94 primary indexes tracked by Bloomberg.

Sol Slump

The sol has dropped 6.7 percent against the dollar this year, while the yield on the country’s benchmark sol bond due 2020 rose to 5.26 percent on June 10, its highest in a year.

“Nervousness among foreign investors led to the correction in bonds and the currency, but there’s no fundamental change in the economy,” Diego Marrero, the deputy head of investments at Credifondo, Peru’s largest mutual fund manager, said by phone from Lima. “I don’t see a dramatic slowdown in growth.”

Annual inflation has fluctuated between 2.3 percent and 2.6 percent for the past four months, and will end the year at close to 2 percent, according to the central bank. Policy makers target inflation of 2 percent plus or minus one percentage point.

“Inflation is within the target range so that’s not a cause for concern,” Marrero said. “The bank will keep monitoring the data before making any decision to raise or cut.”

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