Peru Keeps 4.25% Rate as Inflation Retreats Amid Sol's Rally

  • Central bank stays on hold for a second consecutive month
  • Falling inflation expectations gave central bank room to pause

Peru kept borrowing costs unchanged for a second month as slowing inflation and a rally in the sol give policy makers more time to gauge the impact of earlier rate increases.

The central bank board, led by bank President Julio Velarde, maintained the key rate at 4.25 percent, matching the forecasts of 11 of 14 economists surveyed by Bloomberg. Three analysts expected the board to raise to 4.5 percent.

In a statement accompanying the decision to pause, policy makers cited declining food and utility prices, the sol’s appreciation and a recovery in growth, adding they stand ready to consider additional rate increases.

“Recent indicators for economic activity and business sentiment point to GDP growth rates similar to potential,” the statement said.

Inflation expectations eased last month after the central bank raised borrowing costs at four of its previous seven meetings and the sol ended an almost two-year losing streak against the dollar. A presidential runoff between two business-friendly candidates likely will fuel a rebound in private investment in the coming months, but for now the labor market remains weak, Banco de Credito del Peru said in a report Wednesday.

“Raising rates too much in an economy that’s standing still or not growing much could hurt consumption,” said Cesar Fuentes, a professor at the Esan business school in Lima. “It’s a dilemma they’ll probably face all year as inflation is high.”

Peru joins Chile in extending its pause amid slowing inflation and sluggish domestic demand.

Copper, Elections

Rising output from new copper mines has bolstered growth in the world’s third-largest producer of the metal, offsetting weak construction activity and falling investment. Peru’s urban formal employment rate grew an annual 0.7 percent in the three months ending in January, the lowest since 2009, according to Banco de Credito.

Gross domestic product likely rose 4 percent in the first quarter and will continue at that pace during 2016, Finance Minister Alonso Segura said Tuesday. Peru’s potential growth rate is 4.5 percent, according to the central bank.

Analysts’ inflation expectations for 2017 fell to 2.8 percent last month from 3 percent, according to the central bank’s monthly survey. Annual inflation slowed to 4.3 percent in March, easing for a second consecutive month. The central bank targets inflation in a range of 1 percent to 3 percent.

Keiko Fujimori and Pedro Pablo Kuczynski placed first and second in the April 10 election and will face each other in a June 5 runoff. Veronika Mendoza, who pledged to lower interest rates to revive growth, finished third.

Policy makers will raise the key rate in June or July should inflation remain above 4 percent and then resume a wait-and-see stance, Fuentes said.

“There’s been a lot of noise from the elections and U.S. monetary policy and they won’t want to generate generate more noise than there is already,” Fuentes said.

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