Peru Keeps 4% Rate as Reserve Requirement Cuts Signal Recovery

Peru’s central bank kept borrowing costs unchanged after cutting reserve requirements for a sixth time in seven months to fuel a rebound in growth.

The seven-member board, led by bank President Julio Velarde, yesterday maintained the overnight rate at 4 percent for a third straight month, matching the estimates of 14 of 15 economists surveyed by Bloomberg. One analyst forecast a quarter-point reduction to 3.75 percent.

While the economy has been growing below potential, activity indicators and the bank’s surveys of expectations “signal a recovery in economic activity in the first quarter,” according to the central bank’s communique.

Peru’s economy is rebounding from the slowest expansion since the 2009 recession as a government infrastructure drive fuels business confidence and new copper mines ramp up production. Lower reserve requirements will spur bank lending this year, allowing policy makers to keep rates on hold in the months ahead, said Mario Guerrero, an economist at Scotiabank Peru SAA in Lima.

“Indicators show the economy is growing above 5 percent, which reduces the probability the bank will move its benchmark rate in the short term,” Guerrero said in a phone interview. “The recovery will be stronger in the second half when mining production picks up.”

South America’s sixth-largest economy probably expanded 5.1 percent in December, from 4.8 percent in November, according to the median estimate of analysts surveyed by Bloomberg. The government’s statistic agency is scheduled to issue its report at 10am Lima time.

‘Almost Neutral’

Growth will accelerate to 5.6 percent this year and 5.9 percent next year, spurred by rising domestic demand and copper exports, BBVA Banco Continental economists led by Hugo Perea said in an e-mailed report to clients yesterday.

The central bank will likely raise borrowing costs by 75 basis points in 2015 as the rate of expansion exceeds potential, which the Lima-based bank estimates at 5.5 percent.

Gross domestic product rose 4.4 percent in the third quarter, the weakest pace in more than three years, after falling export revenue in the world’s third-largest copper producer damped private investment.

Policy makers are more optimistic about the economy than when they cut rates in November for the first time in four years, Velarde said in a Feb. 3 interview. The monetary policy bias is “almost neutral,” the Brown University-trained economist said.

The board is ready to consider “additional measures to loosen monetary policy instruments, if needed,” it said in its statement yesterday.

Inflation Outlook

The sol fell 0.1 percent to 2.8170 per dollar yesterday, according to Datatec prices. The currency has declined 8.9 percent in 12 months, the 11th-worst performance against the dollar among 24 major emerging market currencies tracked by Bloomberg.

Yields on Peru’s benchmark 7.84 percent sol-denominated bonds due August 2020 rose five basis points to 6.03 percent

The central bank said Jan. 31 it will lower the reserve requirement ratio for soles to 13 percent from 14 percent, the lowest level in three years.

Exports fell 9 percent in December from a year earlier, compared with a 16 percent drop in November, while imports were virtually flat, the statistics agency said Feb. 10. Manufacturing, construction and services industries reported an improved demand outlook last month, the bank said Feb. 11.

Consumer prices rose 0.32 percent last month, the quickest pace since August. Annual inflation quickened to 3.07 percent, breaching 3 percent for the first time in three months. The central bank targets inflation of 1 percent to 3 percent.

Annual inflation will ease from March and end this year at around 2 percent, Velarde said.

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