Peru Keeps 4.25% Rate as Growth Withstands Metals Slump

Peru’s central bank kept borrowing costs unchanged for a 26th straight month as domestic demand and construction fuels growth, offsetting a drop in metal prices.

The five-member board, led by bank President Julio Velarde, maintained the overnight rate at 4.25 percent, matching the forecasts of all 13 economists surveyed by Bloomberg.

South America’s sixth-largest economy expanded 7.7 percent in April, the fastest pace in two years, led by construction and retailing. The Finance Ministry has also moved to head off any downturn in growth triggered by a drop in Chinese demand for copper and gold, Peru’s top exports, by announcing measures to bolster business sentiment and private investment.

“Inflation is forecast to converge to the center of the target range in the coming months due to food supply conditions improving, a pace of economic output close to its potential and inflation expectations anchored in the target range,” policy makers said in their statement posted on the central bank’s website

Gross domestic product probably expanded 6.5 percent in the second quarter and growth will remain above 6 percent for the rest of this year, Velarde told reporters July 1.

China Demand

On a seasonally adjusted basis, the economy expanded 5.4 percent in April, according to the central bank, while inflation remained within the target band of 2 percent plus or minus 1 percentage point.

Annual inflation accelerated to 2.77 percent last month from 2.46 percent in May. Still, Velarde forecast the pace of price gains will slow to about 2 percent in December.

Inflation could further decelerate this year amid slower Chinese growth, the central bank said in a June 21 report. China is Peru’s largest export market after the U.S.

Copper prices are down 13 percent in New York this year while gold has retreated 24 percent. The metals account for half Peru’s shipments overseas.

Peru reported a $404 million trade deficit for May, the widest gap in at least seven years, the country’s statistics agency said yesterday. The median estimate of five analysts in a Bloomberg survey was for a $250 million shortfall.

“External indicators still show a weak performance, which is affecting export prices and volumes,” policy makers said in their statement.

Rate Horizon

The drop in exports may lead the central bank to ease monetary policy, though the bank will probably prioritize reductions in reserve requirements over interest rate cuts, said Diego Llona, a bond trader at Banco Santander’s local unit.

“April’s growth rate was impressive, we’ll have to see how the second quarter turned out to confirm or discard the downward bias in rate policy,” Llona said.

The Lima General stock index has plunged 27 percent this year in local currency terms, the steepest decline among 94 primary indexes tracked by Bloomberg. The central bank sold dollars in the foreign exchange market last week for the first time since May 2012 to stem declines in the sol. The currency has weakened 7.9 percent this year.

Business sentiment slid in May to its lowest since September 2011, according to the central bank.

New Directors

To prevent a slowdown in growth, Humala’s administration is simplifying permitting procedures and making it easier for businesses to tap capital markets, Finance Minister Miguel Castilla said June 27.

Private investment will pick up in the second half of 2013 and grow 8.8 percent this year, compared with 14 percent in 2012, the central bank said June 21.

After raising reserve requirements five times since May 2012, the central bank set a 20 percent limit on the ratio for lenders’ sol deposits last month.

The bank said it is ready to further relax reserve requirements, after adjusting rules in May and June to spur lending in soles.

Policy makers probably will defer significant changes to monetary policy until after Congress fills vacant seats on the central bank’s board, said Cesar Penaranda, the chief economist at the Lima Chamber of Commerce. Lawmakers are expected to ratify the appointment of three directors July 17.

“They’ll want to evaluate thoroughly the international situation and allow the new directors to participate in any substantive measures,” Penaranda said.

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