Peru Central Bank Cuts Growth View as Copper Revenue Shrinks

Peru’s economy will grow more slowly than previously forecast this year and next on lower than expected copper and gold production, central bank President Julio Velarde said.

The central bank has reduced its 2014 economic expansion forecast to 4.4 percent from 5.5 percent in April, Velarde told reporters today during a presentation of the bank’s quarterly inflation report at the central bank in Lima.

“We had shocks on the supply side that we weren’t expecting,” Velarde said, citing reduced copper output and delays to a new copper mine. “We think they’ll be transitory.”

Growth in Peru’s $200 billion economy is slowing after weaker Chinese demand triggered a slump in sales of metals that account for half its exports. The central bank cut its key lending rate last week for the first time in eight months and the government expanded fiscal stimulus amid the sharpest economic deceleration since 2009.

The central bank also lowered its 2015 growth forecast to 6 percent from 6.7 percent, according to the report. Analysts surveyed by Bloomberg estimate gross domestic product will climb 5.25 percent this year and 5.6 percent next.

Peru’s economy lost momentum in the second quarter after a decade of growth averaging 6.3 percent, the fastest in South America. Economic activity rose 1.8 percent in May, the slowest annual pace since October 2009, as mining output fell and retail slowed. April’s expansion was 2 percent.

Trade Deficit

Peru, the third largest copper and zinc producer in the world, will post a trade deficit of $2.6 billion in 2014 as export revenue falls for a third straight year, according to today’s forecasts. The deficit will narrow to $2.2 billion in 2015.

The central bank has cut the reserve requirement ratio 10 times since June 2013, freeing up 9 billion soles ($3 billion) for lending. The moves boosted annual loan growth to 15 percent in May from 13 percent a year earlier.

The central bank unexpectedly lowered the overnight rate by a quarter-percentage point to 3.75 percent on July 10, triggering a rally in the government’s sol-denominated bonds.

The move came as President Ollanta Humala approved a one-time 200-sol bonus for government workers this month to help offset a slump in private investment.

A push to boost public works spending has been undermined by local government corruption probes, which led to a fall in investment in the first half of the year.

Investment Growth

Public and private investment growth will rebound in the second half of this year while mining investment fall this year and next after rising 14 percent in 2013, Velarde said.

Asked whether the central bank’s board will lower the benchmark rate at its Aug. 7 meeting, Velarde said the decision will be based on the economic data and reiterated that last week’s reduction is not necessarily the first in series of cuts.

“We’ll see if it can really help this process, and we’ll also see how inflation is,” he said.

Inflation will ease to 2.8 percent by December and to 2 percent in 2015, within the bank’s target of 1 percent to 3 percent, Velarde said. Inflation was 3.45 percent last month.

The government’s notes due 2020 rose 1.1 centimo to 116.43 centimos per sol this week and were little changed at 2:01 p.m. in Lima. The yield fell 19 basis points, or 0.19 percentage point, to 4.68 percent this week.

Economic growth will be “much better” in the second half of this year as signs emerge that a recovery is taking hold this month, Alonso Segura, chief adviser to the finance minister, told Lima-based Radio Programas today. The economy will grow 4 percent to 4.5 percent this year and 6 percent in 2015, he said.

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