Peru Keeps 4.25% Rate With Inflation Expectations in Target Band

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  • Central bank extends holds rate unchanged for seventh month
  • Inflation remains in target band amid sluggish economic growth

Peru’s central bank kept borrowing costs unchanged as inflation expectations eased back to its target range after four rate increases in the last year.

The central bank board, led by bank President Julio Velarde, held the key rate at 4.25 percent for a seventh consecutive month, matching the forecast of all 12 economists surveyed by Bloomberg.

The decision is consistent with the central bank’s forecast for inflation to converge gradually to 2 percent by the end of 2017, according to the statement. While business sentiment is on the rise, construction and manufacturing has fallen in the last two months because of weak investment, it said.

The board is ready “to consider adjustments to the benchmark rate,” it said.

Peru’s annual inflation rate fell for a seventh month in August as a stronger sol and subdued domestic demand limited price gains. Policy makers adopted a more neutral tone in their last two communiques, after signaling in previous statements that they’re ready to consider additional rate increases.

“The latest inflation readings consolidate this neutral stance, with inflation and more importantly inflation expectations within the target range,” Mario Guerrero, an economist at Scotiabank Peru, said by phone from Lima. “It increases the likelihood rates will remain on hold for the rest of this year.”

Inflation expectations for 2016 fell below the upper limit of the target band for the first time this year in the central bank’s latest monthly survey of economists. That’s after annual inflation eased to 2.94 percent last month from a four-year high of 4.61 percent in January. The central bank targets a range of 1 percent to 3 percent.

Peru’s economy is expected to grow 4 percent this year, as surging copper output offsets a two-year slump in private investment, according to the central bank.

The “timid” recovery in non-mining investment should strengthen given improved business sentiment, Velarde said at an event in Lima on Wednesday.