Peru Raises Rate for Third Month as CPI Rises to 4-Year High

  • Currency's slide to lowest level since 2002 fuels price rises
  • Economic growth is quickening on expanded mining production

Peru increased borrowing costs for the fourth time in six months as a slumping currency exacerbates above-target inflation and economic growth rebounds.

Policy makers, led by central bank President Julio Velarde, raised the benchmark lending rate by a quarter point to 4.25 percent, as forecast by 13 of 16 economists surveyed by Bloomberg. Three analysts expected no change.

Currency weakness, and rising costs for some foods and utilities have increased inflation expectations above the target range, which could further fuel inflation, the board said in a statement accompanying its decision. The return of inflation to the target range will be gradual, it said.

Policy makers are raising rates at the fastest pace in five years as the economic recovery gathers pace and the sol’s 12 percent slide versus the dollar in the past year keeps inflation above their target range. Real interest rates remain negative, which justifies the central bank’s decision to tighten monetary policy as growth moves closer in line with potential, said Pedro Tuesta, a Washington-based economist at 4Cast Inc.

The board reiterated its view for economy to grow in line with potential this year, after a pick up in the last quarter of 2015.

The Peruvian sol’s slump against the dollar has spurred consumer price gains, pushing up up inflation expectations.

Consumer prices climbed at an annual pace of 4.6 percent in January, which exceeds the benchmark interest rate by 0.35 percentage point even after four 25 basis-point increases since September. Inflation accelerated from 4.4 percent in December and has held above the central bank’s target range of 1 percent to 3 percent for the past 11 months.

The sol fell this week to its weakest level since 2002 as copper prices slide on concern global demand will slow.

Other Andean economies are battling inflation as their currencies slide. Colombia’s central bank has increased its overnight rate for five consecutive months while Chile raised at two of its last five meetings.

Peru boasts the fastest growth of any major Latin American nation. Economic activity likely rose an annual 5.6 percent in December, the strongest pace since 2013, as new mines boost copper production. The national statistics agency will publish its December activity report next week.

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