Peru Keeps Rate as Slower CPI Gives Bank Room to Bolster GDP

  • Policy makers holds at 4.25% for fourth month as sol gains
  • Domestic demand needs more time to recover from export slump

Peru kept borrowing costs unchanged after four increases in the past year as slowing inflation and a stronger sol give policy makers room to bolster growth.

The central bank board, led by bank President Julio Velarde, held the key rate at 4.25 percent Thursday for a fourth consecutive month, matching the forecast of 11 of 12 economists surveyed by Bloomberg. One analyst expected a quarter-point increase. Policy makers cited as reasons for the pause a gradual decline in inflation expectations and economic growth in line with potential.

“Inflation is expected to be within the target range before the end of the year,” the board said in a statement accompanying its decision.

Growth in Peru’s $200 billion economy has gathered pace in recent quarters on the back of new copper mines even as domestic demand remains sluggish. Inflation will continue to slow, aided by the sol’s advance in 2016, nudging inflation expectations back toward policy makers’ target range, said Luis Gonzalez-Prada, an analyst at Apoyo Consultoria.

“The economy still needs monetary stimulus,” Gonzalez-Prada said by e-mail. The board may raise once more this year to ensure inflation expectations reach the target, he said.

Moderating Inflation

Peru’s economy expanded 4.4 percent in the first quarter as copper production surged amid a pick up in construction. Second-quarter growth may be slower as public investment loses momentum with President Ollanta Humala’s term ending July 28, Gonzalez-Prada said.

In last Sunday’s election, Pedro Pablo Kuczynski, a 77-year-old former finance minister and Wall Street veteran, won the majority of votes. Kuczynski had 50.12 percent of votes with all the ballots processed, compared with 49.88 percent for Keiko Fujimori, the country’s election office said Thursday.

After appreciating 2.4 percent in June through Wednesday amid a rally in emerging-market assets and on speculation the election would usher in an investor-friendly government, the sol weakened 1 percent in the last two days to close at 3.3305 per dollar on Friday.

Electricity consumption excluding demand from new mines, rose last month at the slowest pace since 2009, Banco de Credito del Peru said in a report published Monday.

The annual inflation rate fell to a one-year low of 3.54 percent in May, as the sol has appreciated so far in 2016 after three years of declines and as the El Nino weather system retreats.

On a conference call with reporters Friday, Adrian Armas, the monetary authority’s chief economist, said year-on-year inflation will continue to slow this month thanks to a “moderate” rise in consumer prices.

(An earlier version of this story was corrected to show that country’s currency had appreciated in the year to date.)

Before it's here, it's on the Bloomberg Terminal.