Peru Unexpectedly Leaves Rate Unchanged to Bolster Recovery

  • Inflation slowed in February, sol rebounded from 13-year low
  • Policy makers raised rate at four of last seven meetings

Peru unexpectedly kept borrowing costs unchanged to gauge the impact of four interest rate increases in seven months on inflation expectations.

The central bank board, led by bank President Julio Velarde, maintained the key rate at 4.25 percent on Thursday, surprising 10 of 14 economists surveyed by Bloomberg who expected a quarter-point increase. Four analysts accurately forecast the decision.

The sol’s appreciation after the central bank adjusted reserve requirements
March 1 gave the bank room to pause, said Fernando Palma, a strategist at Banco de Credito del Peru who correctly forecast Thursday’s decision.

The board’s communique shows they “maintain the bias for further rate
increases in the coming months given they mention they’ll monitor the evolution of inflation expectations” in a context of the quickening growth, Palma said via e-mail. Other measures such as reserve requirements can’t be ruled out, he added.

In the statement accompanying their decision, policy makers highlighted gains in the local currency and forecast inflation will return to the target range gradually. The board is “ready to consider additional adjustments in the benchmark rate,” the statement said.

Peru’s annual inflation rate fell from a four-year high last month while the sol rebounded from a 13-year low in the last two weeks, giving the central bank room to pause. While a surge in mining output lifted economic growth in the last three months of 2015, domestic demand remains weak, with private investment contracting for eight consecutive quarters.

Inflation likely will slow in the second half of this year as the impact of El Nino on food prices fades, causing inflation expectations to fall, said Luis Fernando Gonzalez-Prada, an analyst at Apoyo Consultoria, by e-mail before the decision.

Analysts’ inflation expectations in the central bank’s February survey held at 3.5 percent for this year and 3 percent in 2017. The central bank targets inflation in a range of 1 percent to 3 percent.

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