Peru Raises Rate to 4% as Sol's 3-Year Slump Fans Inflation

  • Third quarter-point increase in borrowing costs in five months
  • Sol fell by most since 1998 last year, fueling rise in prices

Peru increased borrowing costs for the third time in five months after the sol’s slump pushed inflation to a four-year high.

The central bank board, led by central bank President Julio Velarde, raised the benchmark lending rate by a quarter point to 4 percent, as forecast by nine of 15 economists surveyed by Bloomberg. Six analysts expected no change. The central bank said in a statement accompanying its decision that the board is ready to consider additional increases to steer inflation to the target range.

The sol’s 13 percent drop last year, the biggest since 1998, caps three years of declines and is fueling price rises on imports of everything from televisions to medicines to whisky. Consumer price increases have pushed up inflation expectations for 2016 even as an investment slump damps domestic demand. Economic growth quickened in the fourth quarter and will be in line with potential in 2016, it said.

“The central bank is sending a signal to the market that it’s on top of things by raising the rate preventively,” said Hugo Perea, chief economist at BBVA Banco Continental, by phone from Lima. “Inflation will remain above 4 percent this month, but it’s due to transitory factors such as the currency. Domestic demand remains weak.”

Annual inflation accelerated to 4.4 percent in December, the fastest pace since 2011. Currency depreciation was responsible for two-thirds of last year’s inflation excluding food and energy, which was the highest since 2009, the central bank said Jan. 11.

Growth Quickening

The central bank targets annual inflation of 1 percent to 3 percent and said last month that consumer price increases will be back within range this year. Analysts disagree and expect a 3.4 percent rise this year, according to the central bank’s latest monthly survey.

Policy makers in neighboring Chile and Colombia both raised their overnight rates last month to rein in above-target inflation and Brazil is expected to resume raising borrowing costs next week.

Peru’s central bank likely will raise its key again in March as the exchange rate pass through and adverse weather continue to pressure prices, said Goldman Sachs Group Inc. Raising rates faster would help normalize “excessively accommodative financial conditions” and boost the central bank’s credibility, analyst Tiago Severo wrote Wednesday in an e-mailed note to clients.

“We originally assumed the central bank would raise rates by a total of 50 basis points during 2016,” Severo said. “However, in the new scenario the risk that the authorities may be forced to do more is certainly much higher than before.”

Peru’s economic growth has quickened in recent month thanks largely to rising output from new copper mines. Economic activity likely rose 3.8 percent in November, compared with 3 percent in October, according to the median estimate of analysts surveyed by Bloomberg.

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