Peru Raises Rate for Fourth Time in Six Months as Chile Pauses

  • Sol's slide to lowest level since 2002 fuels price rises
  • Peru's GDP rebound constrasts with sluggish Chilean growth

Peru increased borrowing costs for the fourth time in six months citing above-target inflation as the economic recovery gathers momentum. Shackled by weaker growth, Chile left its rates unchanged.

Peru’s central bank board raised the benchmark lending rate by a quarter point to 4.25 percent Thursday, as forecast by 13 of 16 economists surveyed by Bloomberg. Three analysts expected no change.

Policy makers are raising rates at the fastest pace in five years as Peru’s economic recovery gathers pace and the sol’s 12 percent slide versus the dollar in the last 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 economy is “growing because of the primary sector but inflation data shows there is growth in demand so inflation isn’t going to come down easily,” Tuesta said by telephone before the decision.

The Peruvian sol’s slump against the dollar has spurred consumer price gains, pushing 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 last 11 months.

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

Region, Chile

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

The outlook isn’t so rosy in neighboring Chile, where analysts see risks for further deceleration.

Policy makers held the key rate at 3.5 percent Thursday for a second consecutive month, as forecast by all 24 economists surveyed by Bloomberg.

Analysts cut their 2016 growth forecast for Chile this week to 1.9 percent from 3 percent in July as consumer and business confidence remain at the weakest levels since the 2009 recession and copper exports tumble, according to a survey by the central bank.

“Economic activity still has risks on the downside, and the central bank is waiting for further information on the labor market to hike again,” Marco Oviedo, Mexico/Chile chief economist at Barclays Plc, said before the decision.

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