Peru Keeps 4% Rate After Reserve Requirement Cuts Revive Growth

Peru’s central bank kept borrowing costs unchanged for a second straight month after cutting reserve requirements to a three-year low to fuel a rebound in growth.

The seven-member board, led by bank President Julio Velarde, yesterday maintained the overnight rate at 4 percent, as forecast by all 19 economists surveyed by Bloomberg.

Indicators for December “signal a recovery in economic activity in the last quarter,” the central bank said in a statement accompanying the decision. “The board is monitoring the outlook for inflation and its determinants and, if necessary, will implement additional measures to ease monetary policy instruments.”

Peru last month reduced the amount of cash lenders must hold in reserve for the fifth time since August after the economy expanded at the slowest pace since 2009 in the third quarter. The measure is more effective at boosting credit than rate cuts and will help spur domestic demand this year as stronger global growth boosts exports, said Fernando Iberico, an economist at Inteligo SAB, a Lima-based brokerage.

“The bank has an ample margin to keep lowering reserve requirements. In the short term, that’s where we’ll see any changes to monetary policy,” Iberico said by phone. “We’re starting to see some signs of recovery, but it’s going to be slow.”

The central bank unexpectedly cut the key rate by 25 basis points Nov. 7 in its first move since May 2011 as falling exports damped investment in the world’s third-largest copper producer.

Growth Forecast

Consumer and business confidence sagged as the sol fell 8.8 percent against the dollar last year, the first decline since 2008, copper prices tumbled 7.2 percent and the Lima General Index of stocks fell 24 percent, the most among 94 primary indexes tracked by Bloomberg.

The central bank cut its 2013 growth forecast to 5.1 percent in a Dec. 20 report from 5.5 percent three months earlier. It forecast a 6 percent expansion this year as mining production increases.

Economic activity rose 5.4 percent in October, the fastest pace in six months and above the 5.2 percent median estimate of analysts surveyed by Bloomberg, as mining, construction and retail growth quickened.

Cement and electricity demand slowed in November while exports dropped 20 percent, the statistics agency said Jan. 1.

‘Output Gap’

Policy makers favor using reserve requirements to boost demand, though they would cut rates should demand decelerate further or the sol appreciate too quickly, Velarde told reporters Dec. 20.

The central bank will cut the key rate next month as policy makers alternate between reductions in interest rates and reserve requirements, Bank of America said in a Jan. 7 report.

President Ollanta Humala’s government, which increased public investment 19 percent to a record last year, probably will raise spending again to support growth, JPMorgan Chase & Co. said in a Jan. 7 note to clients.

Consumer prices rose 0.17 percent last month after falling 0.22 percent in November, while the annual inflation rate eased to 2.86 percent from 2.96 percent. Inflation will slow to about 2.4 percent this year, according to the central bank.

“The fact that there is an output gap will reduce the upward pressure on prices this year,” Iberico said.

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