Peru Keeps Rate Unchanged at 4% Amid Signs of Economic Recovery

Peru kept borrowing costs unchanged as policy makers said the economy is showing signs of rebounding following last month’s surprise interest rate cut.

The board, led by bank President Julio Velarde, yesterday maintained the overnight rate at 4 percent, matching the estimates of 16 of 20 economists surveyed by Bloomberg. Four analysts forecast a quarter-point reduction to 3.75 percent.

Economic “indicators for November signal a recovery in economic activity in the final quarter” of 2013 while there are also signs of improvement in the global economy, policy makers said in their statement posted on the central bank’s website. The board is ready to take “additional measures to ease monetary policy instruments, if needed.”

Peru last month reduced interest rates for the first time in four years and lowered reserve requirements for the fourth time since August as falling exports damp investment in the world’s third-largest copper producer. Policy makers still have room to reduce borrowing costs further should economic growth fail to pick up again, Velarde said this week.

“Business confidence is improving and the central bank sees growth rebounding,” said Juan Lorenzo Maldonado, an economist at Credit Suisse Group AG, by phone from New York. “If activity continues to disappoint in October and November and we see weaker consumption trends, that’s when they’ll continue reducing interest rates.”

Solid Fundamentals

Peru’s economy expanded an average 6.5 percent in the last decade as surging metal prices fueled mining investment and incomes rose. The pace of expansion slowed to 4.4 percent in the third quarter, as exports fell and construction and retail sales moderated.

The country’s export slump continued in October, as shipments overseas dropped 12 percent, while construction and electricity output increased.

Velarde on Dec. 10 said that Peru has solid economic fundamentals and can draw on fiscal savings and lower interest rates and reserve requirements if external shocks emerge.

“If things get worse -- I don’t think they will get worse -- but if they get worse, we have the instruments with which to react,” the Brown University-trained economist said.

Last month’s rate cut, which surprised all 15 analysts surveyed by Bloomberg, sparked a rally in local government debt. Yields on the country’s sol-denominated bond due August 2017 have fallen 0.43 percentage point to 4.17 percent since the Nov. 7 policy meeting, according to prices compiled by Bloomberg.

Peru’s sol has fallen 8.1 percent against the U.S. dollar this year while the Lima General Index of stocks has dropped 32 percent in dollar terms, the worst performance among 94 primary indexes tracked by Bloomberg.

Steepest Drop

Chile and Mexico this year have also lowered borrowing costs to offset weaker global demand. Mexico’s central bank cut rates at two straight meetings before deciding to pause at 3.5 percent on Dec. 6.

Peru’s consumer prices fell 0.22 percent in November, the steepest drop since 2009, driving the annual inflation rate down to 2.96 percent. The central bank, which targets inflation of 1 percent to 3 percent, forecasts inflation will slow to 2 percent next year.

Core inflation, a measure of prices that excludes more volatile items such as perishable food and fuel, was 3.7 percent in November and faster than the central bank’s target for a 29th month.

Inflation will remain near the top of policy makers’ target band initially before slowing to 2 percent, the bank said in its statement.

More companies reported rising output in November compared with October, the central bank said Dec. 8. Velarde this week said the economy probably will grow 5.5 percent to 5.6 percent in the fourth quarter, and about 6 percent in 2014.

“We’ve been very clear that the rate cut in November doesn’t signify the start of a cycle,” Velarde said in a Dec. 10 interview in Bogota. “The decision to cut the interest rate in the future will depend on how we see internal demand and the factors that determine inflation.”

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