Peru Likely to Keep 4.25% Rate After Bank’s Reserve Reductions

Peru’s central bank probably will keep borrowing costs unchanged today for a 27th straight month after reducing reserve requirements to counter slower growth.

The five-member board, led by bank President Julio Velarde, will maintain the overnight rate at 4.25 percent, according to all 13 economists surveyed by Bloomberg, matching Malaysia for the longest interest-rate pause in developing countries. The decision will be announced at 6 p.m. Lima time.

Policy makers lowered reserve requirements effective Aug. 1 after growth lagged behind economists’ estimates in five of the last six months due to a slump in metal exports. The central bank will likely refrain from cutting interest rates today as Peru remains Latin America’s fastest growing major economy on the strength of robust domestic demand, said Hedmond Rios, an economist at BTG Pactual in Santiago.

“The economy is growing very close to its potential, private investment is healthy and consumer demand is growing at a more sustainable pace,” Rios said. “In the next few months, central bank policy will be limited to cuts in reserve requirements.”

The central bank on Aug. 1 lowered the percentage of depositors’ balances in soles and dollars that commercial banks must have on hand as cash after credit expanded at the slowest pace since December 2009, and the sol weakened to a two-year low.

‘Clear Signs’

The central bank began relaxing reserve requirements in April after using the measures at least 36 times to tighten the supply of either soles or dollars between February 2010 and March this year.

“Clear signs of deceleration” leave the central bank “trapped in a dilemma of its own,” said Francisco Rodriguez, senior Andean economist at Bank of America Corp., in an e-mailed note to clients Aug. 6. The bank runs “the risk of losing credibility if it loosens monetary policy with both core and headline inflation out of the target band. For now, it will continue to hold the reference rate while possibly considering some further cuts in reserve requirements.”

Speaking to reporters in Lima on July 24, Velarde said the measure would potentially inject about 560 million soles ($200 million) and $150 million into the economy. Cutting reserve requirements has an immediate impact, unlike changes to the benchmark rate, and is designed to bolster demand, he said.

“Though consumption continues to be strong, there is a slight deceleration,” Velarde said. “We’re trying to offset that a little.”

Growth, Exports

Velarde reiterated the central bank’s 2013 economic growth forecast of 6.1 percent nine days after the government on July 15 reported that the economy expanded 5 percent in May, below the 5.5 percent median forecast of analysts in a Bloomberg survey.

Slower growth in China and Europe has damped prices for Peru’s copper and gold, which account for about half of the South American country’s exports. Copper has declined 13 percent in New York this year, and gold is down 23 percent.

Exports dropped 19 percent in June from a year earlier, and imports fell 1 percent, the national statistics agency said Aug. 1. Peru had a record trade deficit of $404 million in May. The agency reports June’s trade balance tomorrow.

Finance Minister Miguel Castilla has pledged to speed up infrastructure investment and cut red tape after business sentiment plunged to its lowest in at least a year in June, according to the central bank.

Policy Limits

Cia. De Minas Buenaventura SAA, the country’s largest precious metals producer, said July 30 it will close three mines and scale back exploration.

Inretail Peru Corp., a Lima-based supermarket operator, will slow the pace of store openings this year after consumer demand slowed, Chief Financial Officer Augusto Rey told analysts during a July 31 conference call.

Lower metal prices caused income tax revenue to fall 3.5 percent in June, the tax agency said July 8. The decline was offset by a 5.4 percent rise in sales tax collections.

Construction and retail expansions will help mitigate the external weakness, and policy makers won’t cut borrowing costs unless they see clear signs of domestic demand slowing, said Pedro Tuesta, a Latin America economist at 4Cast Inc.

“Growth will be weaker than the central bank was anticipating,” Tuesta said in a phone interview from Washington. “The main reason is external demand for which the central bank can do nothing.”

Higher food prices in July pushed the annual inflation rate above the central bank’s target range of 1 percent to 3 percent for the first time in nine months.

Consumer prices rose 0.55 percent, driving annual inflation to 3.24 percent from 2.77 percent in June. Slower growth will put inflation back below 3 percent by year-end, BTG Pactual’s Rios 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 sol has weakened 8.8 percent over the same period. The central bank sold dollars in the foreign exchange market last month for the first time since May 2012 to stem declines in the sol.

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