Peru Keeps Rate at 4% on Signs of Nascent Recovery in Growth

Peru kept borrowing costs unchanged after central bank President Julio Velarde said the economy was showing the first signs of recovery following a slump in investment.

The seven-member board, led by Velarde, maintained the overnight rate at 4 percent yesterday for a sixth straight month, matching the estimates of all 15 economists surveyed by Bloomberg.

“Inflation is forecast initially to remain close to the upper limit of the target range because of the lag effect from supply shocks” before trending to 2 percent, policy makers said in their statement posted on the central bank’s website.

Construction and manufacturing are picking up as the government spurs infrastructure investment to offset a drop in the price of copper, the country’s biggest export. While the central bank on April 25 cut its forecast for gross domestic product growth this year to 5.5 percent from 6 percent on lower-than-expected copper output, domestic demand is growing close to potential and inflation remains above its target, said Pedro Tuesta, an economist at 4Cast Ltd.

Growth in Peru, the third-largest copper, zinc and silver producer, eased to 5.6 percent in 2013, the slowest pace since 2009. Expansion probably eased further to between 5 percent and 5.5 percent in the first quarter as private investment touched bottom, Finance Minister Miguel Castilla said April 10.

Indicators, Trend

The auction of infrastructure contracts will help the economy recover, Velarde told reporters April 25. Though cement and electricity output signal the economy is gaining momentum, the bank wants to see more evidence that the recovery has taken hold, Velarde told reporters April 25.

Cement demand rose 6 percent in March from a year earlier while electricity output expanded 6.8 percent, according to the central bank.

“The indicators are positive but there’s still not a clear recovery trend,” Velarde said. The auction of infrastructure contracts will help the economy recover, he said.

The government plans to auction rights to a record $12 billion in infrastructure projects this year, while public works spending will rise to a 30-year high, Castilla said. Work on Lima’s first subway line, Peru’s biggest-ever infrastructure project, is due to start next month.

Imports climbed 4.3 percent in March from the year earlier on the strength of domestic demand, while exports plunged 21 percent on lower metal shipments, the country’s statistics agency said May 1.

The central bank kept the reserve requirement ratio for soles unchanged this month after eight cuts in the previous nine months freed up 8.5 billion soles ($3.1 billion) for lending.

Consumer prices rose 0.39 percent last month and climbed 3.52 percent on an annual basis, exceeding the central bank’s target range of 1 percent to 3 percent for a fourth month.

Indicators and surveys signal economic activity is “dynamic” though the pace of growth is slower than expected, the central bank said in its statement. The bank expects inflation to converge to the target band this year and 2 percent next year.

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