Peru Keeps 4% Key Rate After Measures to Stem Deceleration

Peru kept borrowing costs unchanged after the central bank said it will lower reserve requirements and the government took steps to offset slowing exports.

The seven-member board, led by bank President Julio Velarde, held the overnight rate at 4 percent for a seventh straight month, matching the estimates of all 12 economists surveyed by Bloomberg.

“The level of the reference rate is compatible with a projected convergence of inflation to the target range in 2014 and 2 percent in 2015,” policy makers said in their statement posted on the central bank’s website.

Falling export revenue in the world’s third-largest copper producer led President Ollanta Humala to unveil legislation yesterday to reduce the financial burden on companies and accelerate public and private investment. The central bank said June 10 it will lower the reserve requirement ratio next month for the fifth time this year.

“The authorities have unified the message that both monetary policy and fiscal policy will have a more expansive bias in the coming months,” said Mario Guerrero, an economist at Scotiabank Peru in Lima. “Growth will be closer to 5 percent than the 6 percent expected at the beginning of the year.”

The World Bank cut its 2014 global growth forecast this week amid weaker outlooks for the U.S. and China, Peru’s top trading partners. The Washington-based lender projects a 4 percent expansion for Peru, compared with a January estimate of 5.5 percent.

The central bank sees Peru growing 5.5 percent in 2014. Finance Minister Miguel Castilla said June 10 the government may revise its 5.7 percent projection as growth has been weaker than expected.

Peru’s exports fell 15 percent in April from a year earlier to $2.7 billion, the lowest in almost four years, the central bank said June 6. Imports rose 1.6 percent.

Policy Choices

Economic activity probably increased 2 percent in April from a year earlier, the slowest pace since 2009, Banco Bilbao Vizcaya Argentaria’s local unit said in a June 10 note to clients.

Output at Peru’s biggest copper mine, owned by Cia. Minera Antamina SA, fell 4 percent in April from a year earlier as the company tapped lower ore grades. The country’s copper production will increase in the second half of 2014 as the Toromocho mine owned by Chinalco Mining Corp. International reaches full capacity, Velarde told reporters June 10.

The annual inflation rate rose to 3.56 percent last month from 3.52 percent in April. The central bank targets inflation in a range of 1 percent to 3 percent.

Inflation will slow to about 3 percent this year and return to the target range next year, Guerrero said.

“There shouldn’t be demand pressures as the economy decelerates,” he said. “The central bank is more likely to resume a cycle of reserve requirement reductions than cuts in the benchmark rate.”

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