Peru Raises Rate to Tame CPI at Four-Year High as Chile Pauses

  • Peru's sol fell most since `98 last year, fueling price rises
  • Chile rate kept at 3.5% after December's quarter-point raise

Peru increased borrowing costs for the third time in five months after the sol’s slump pushed inflation to a four-year high, while Chile kept its key rate on hold.

Peru’s central bank board, led by central bank President Julio Velarde, raised the benchmark lending rate by a quarter point to 4 percent Thursday, as forecast by nine of 15 economists surveyed by Bloomberg. Six analysts expected no change.

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.

“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.

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.

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.

Economic growth quickened in the fourth quarter and will be in line with potential in 2016, Peru’s central bank said in a statement accompanying Thursday’s decision.

Weak Growth

In neighboring Chile, policy makers left the benchmark interest rate at 3.5 percent Thursday, as data confirmed weak economic growth persisted into the last quarter of 2015. The decision was forecast by all 23 economists surveyed by Bloomberg.

The central bank board, led by bank President Rodrigo Vergara, raised interest rates twice in the previous three months as inflation rose back above the target range.

The central bank has said Chile requires “gradual and prudent” rate increases that keep a lid on inflation while enabling a recovery in what policy makers last month described as “feeble” growth. With business confidence at similar levels to those during the 2009 recession and with little sign of a recovery, the central bank is in no hurry to raise rates, analysts said.

“Gradualness will characterize the current withdrawal of monetary stimulus, given that activity remains depressed,” Nathan Pincheira, an economist at Banchile Inversiones in Santiago, said before the decision. That should “translate into two increases during the year.”

Pressure on growth in the world’s largest copper producer increased further in the past week as the metal fell below $2 per pound for the first time since 2009. Finance Minister Rodrigo Valdes said the government would have to slow spending increases to avoid a jump in borrowing.

The central bank has cut its growth forecasts seven times since March 2013 and now estimates expansion of 2 percent to 3 percent this year, with the risks on the downside.

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