Peru Bonds Rise to Seven-Month High After Surprise Rate Cut

Peru’s local bonds rallied to a seven-month high and the sol declined after the central bank unexpectedly cut borrowing costs for the first time in eight months as the economy grows at its slowest pace since 2009.

The notes due in 2020 climbed 0.14 centimo to 115.02 centimos per sol at 2:10 p.m. in Lima, the highest since Nov. 29, according to data compiled by Bloomberg. Yields fell three basis points, or 0.03 percentage point, to 4.93 percent and were down four basis points for the week.

The central bank lowered the overnight rate by a quarter-percentage point to 3.75 percent after the economy expanded in April at its slowest pace since the 2009 recession. Peru joins Mexico and Chile, where policy makers have also cut interest rates this year to shore up investment.

“There is a non-negligible risk of Peru experiencing a hard stop in terms of economic activity,” said Francisco Rodriguez, an economist at Bank of America Corp., in an e-mailed research note to clients. “The possibility of further rate cuts in the immediate future should not be discounted.”

The sol dropped 0.3 percent to 2.788 per U.S. dollar at the close of trading, according to Datatec prices. The Lima General index of stocks has gained 16 percent in the past three months and rose 0.1 percent today.

Ten of 15 analysts surveyed by Bloomberg expected borrowing costs to be left unchanged. Four analysts accurately forecast the quarter-point cut and one forecast a half-point reduction.

Inflation Outlook

In a statement accompanying yesterday’s decision, policy makers reiterated their forecast for inflation to converge with the target range of 1 percent to 3 percent this year and ease to 2 percent in 2015. Economic indicators suggest activity is weaker than expected, they said, though below-potential growth is expected to be temporary.

Peru’s $200 billion economy expanded 2 percent in April from a year earlier amid contractions in mining and construction. That comes after a decade of annual growth averaging 6.3 percent, the fastest pace in South America.

The economy is growing below potential and “should that continue for longer than desired, there could be another reduction in the benchmark rate,” Adrian Armas, the central bank’s research director, told reporters during a conference call today.

The pace of expansion in May and June was similar to April, Armas said.

Copper Decline

Copper prices have fallen 4.1 percent this year after a 7.2 percent drop in 2013, damping mining investment.

“The economy needs a bit more stimulus” before a pick-up in infrastructure investment takes hold, said Renzo Massa, the head of fixed income at Prima AFP, the country’s second-largest private pension fund. “Peru’s had extremely high rates of growth, so it’s normal for there to be a temporary slowdown.”

The central bank lowered the target lending rate by a quarter-point in November after remaining on hold since May 2011.

Peru’s Congress last week approved legislation to streamline bureaucracy, reduce business overhead and spur infrastructure, mining and hydrocarbons projects. The measures are designed to sustain growth in the medium term while providing an immediate boost to investor confidence, Finance Minister Miguel Castilla told lawmakers June 25.

Moody’s Upgrade

Moody’s Investors Service cited the government’s response to the slowdown as a reason for raising the country’s rating by two levels to A3, the seventh-highest investment grade.

Monthly inflation slowed for a fourth month in June, a sign that slower economic growth has “begun to tilt the balance toward lower inflation,” Alex Muller-Jiskra, an economist at BTG Pactual in Santiago, said in an e-mailed research note to clients yesterday.

Peru’s consumer prices rose 0.16 percent last month while the annual inflation rate slowed to 3.45 percent from 3.56 percent in May.

The central bank probably will “tolerate inflation somewhat above the 3 percent target ceiling to prevent a further slowdown,” said Muller-Jiskra.

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