Peru Unexpectedly Cuts Key Rate to 4% to Revive Growth

Peru’s central bank unexpectedly reduced borrowing costs for the first time in four years to bolster the commodity-dependent economy after exports slumped.

The board, led by bank President Julio Velarde, cut the overnight rate by a quarter-point to 4 percent from 4.25 percent, surprising all 15 economists surveyed by Bloomberg who forecast no change. Peru last cut rates in August 2009 when the economy was in recession.

“Economic growth is decelerating to levels below its potential,” the central bank said. “This decision is of a preventive nature and doesn’t imply a series of reductions.”

Policy makers stepped up efforts to revive growth as falling export revenue damps investment in the third largest copper producer. The central bank reduced reserve requirements Sept. 30 for a third straight month while the government reduces bureaucracy slowing $27 billion of investment projects. Inflation will ease to about 2 percent next year, the mid-point of policy makers’ target range of 1 percent to 3 percent, Velarde said Sept. 20.

The economy expanded 4.3 percent in August, less than the 4.5 percent forecast by analysts surveyed by Bloomberg. Growth has lagged behind economists’ estimates in six of the last seven months. Consumer prices rose 0.04 percent last month while annual inflation accelerated to 3.04 percent from 2.83 percent in September.

Global Context

Copper and gold, Peru’s biggest exports, have fallen 11 percent and 22 percent respectively this year.

The sol has depreciated 8.7 percent over the same period, while the Lima General index of stocks has dropped 21 percent, the biggest slide among 94 primary indexes tracked by Bloomberg.

Peru’s economy will expand as much as 6.3 percent in the fourth quarter, after growing 5.1 percent in the first half of the year, Velarde said Oct. 24.

“We’ve overcome what was a negative first semester for the world,” Velarde said. “The outlook for the global economy and for Peru’s economy is now more encouraging.”

Inflation that’s breached the central bank’s target range in three of the past four months may limit the scope for rate cuts, should growth continue to slow.

Consumer prices rose 0.04 percent in October while the annual inflation rate was 3.04 percent. The central bank targets inflation of 1 percent to 3 percent.

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