Peru Keeps 4.25% Rate as Inflation Trends Lower to Target

  • Central bank extends longest monetary policy pause since 2013
  • Consumer price increases seen within target range by year end

Peru kept borrowing costs unchanged for an eighth consecutive month as economists expect inflation to slow to target by year end amid sluggish domestic demand.

The central bank, led by its president, Julio Velarde, held the key rate at 4.25 percent, matching the forecasts of all 12 economists surveyed by Bloomberg.

The board said its “decision is consistent with a convergence in inflation to 2 percent” by the end of 2017 and reflects a decline in inflation expectations and a economic growth that’s close to its potential, policy makers said in a statement posted on the bank’s website. The board will monitor inflation data and consider changes to the benchmark rate, it said.

Policy makers extended their longest rate pause since 2013 on expectations inflation will end this year within their target band as falling investment undermines consumer demand. The central bank board is waiting to see whether a rebound in private investment materializes in the coming months before deciding on their next move, said Renzo Massa, head of fixed income at Prima AFP.

“You have more confidence among businesses so investment should start to reactivate,” Massa said by phone from Lima. “The bank could lower rates next year if necessary, but for now I don’t see them changing their neutral stance.”

In its quarterly inflation report published last month, the central bank kept its 4 percent forecast for 2016 economic growth and trimmed its 2017 estimate to 4.5 percent from 4.6 percent.

Peru’s economy will strengthen starting in the fourth quarter as infrastructure takes over from mining as a motor for investment, Finance Minister Alfredo Thorne said in an Oct. 6 interview. Executives are more bullish about the economy than at anytime in the past three-and-a-half years, according to the central bank’s latest survey of companies.

Consumer prices rose 0.21 percent last month, causing annual inflation to accelerate for the first time this year, to 3.13 percent from 2.94 percent. The central bank targets inflation in a range of 1 percent to 3 percent.

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