Peru Keeps Rate at 3.25% as Currency Slide Fuels Inflation

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Peru kept borrowing costs unchanged for a sixth month as the fastest inflation in a year deters policy makers from doing more to stimulate sagging domestic demand.

The central bank board, led by President Julio Velarde, maintained the overnight rate at 3.25 percent, matching the forecasts of all 20 economists surveyed by Bloomberg.

“Economic activity continues growing at rates below its potential,” the bank said in a statement accompanying its decision. “Inflation has been affected by temporary supply-side factors that are reverting more gradually than expected.”

The bank extended its pause after inflation accelerated in May and the Peruvian sol dropped 13 percent in the last year. The economy has passed a trough and the central bank will have to leave it to public investment to bolster the recovery in the second half of the year, said Juan Lorenzo Maldonado, an economist at Credit Suisse.

“The inflation outlook isn’t favorable for rate cuts,” said Maldonado by telephone from New York. “Rates will stay on hold in the coming months until the time comes to raise them.”

The annual inflation rate rose to 3.54 percent in May, exceeding the 3 percent top of the central bank’s target range for a fourth month.

Inflation is projected to converge toward 2 percent during 2015 to 2016, the central bank said. Inflation expectations have risen while remaining within the bank’s target range, it added.

“The board is monitoring the outlook for inflation and its determinants and stands ready to change the monetary policy stance if needed,” the statement said.

The sol’s decline against the greenback has blunted the impact of three rate cuts in the last year as borrowers pay more to service dollar-denominated loans. The central bank is using reserve requirements to force lenders to curb dollar lending, which accounts for 35 percent of all credit.

Economic activity has exceeded analyst’s estimates for the last two months amid higher mining and fishmeal output. Still, falling imports and slower consumer spending point to depressed domestic demand.

(Adds central bank comment in seventh, eighth paragraphs.)
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