Peru’s central bank will probably keep its benchmark lending rate unchanged for a second month as inflation and economic growth slow on concern President-elect Ollanta Humala’s policies may damp investment in Latin America’s sixth-biggest economy.
The seven-member board will keep the overnight rate at 4.25 percent today, according to 16 of 17 economists surveyed by Bloomberg, after unexpectedly holding the rate unchanged at last month’s meeting for the first time this year. One analyst predicts a quarter-point increase to 4.50 percent. The board will announce its decision at about 7 p.m. New York time.
Since quickening to a two-year high of 3.3 percent in April, annual inflation decelerated to 2.9 percent in June, within the central bank’s target range of 1 percent to 3 percent. At the same time, reduced spending by companies and consumers both before and after the June 5 election has helped cool growth in the $153 billion economy for three straight months to its slowest pace since February 2010.
“GDP isn’t poised to grow any faster because private investment is falling and that’s reining in inflation,” Pedro Tuesta, a Washington-based Latin America economist at 4Cast Inc., said in a phone interview.
“There’s no sign of a rebound in demand.”
Economic growth has “practically stagnated” and the speed at which it revives will depend on the policies Humala adopts, Lima-based Banco de Credito del Peru, the nation’s largest bank, said in a June 22 report.
Private investment drove Peru’s economy to expand 8.8 percent in the first quarter, leading the central bank to raise rates to a two-year high in May.
‘Investors Are Waiting’
Economic expansion probably slowed to an annual pace of about 6.5 percent in the second quarter, the lowest in a year, as electricity output and cement sales eased, Finance Minister Ismael Benavides told reporters in Lima yesterday.
Companies have scaled back spending since April amid concern Humala’s pledges to increase mining royalties and enlarge state companies may deter the foreign investment that fueled the region’s fastest growth of the last decade.
Though investment will probably recover after the new government takes office and clarifies its policy on mining taxes, the central bank cut its growth forecast to 6.5 percent from 7 percent previously, Velarde said June 17.
“Investors are waiting to see what Humala is going to propose in terms of economic and labor policy,” Benavides said.
Mining projects will account for almost half the $47.5 billion of private investment expected in Peru from 2011 to 2013, according to the central bank.
Factories, Food, Prices
Peru’s factories are using less installed capacity as domestic demand pressures ease, Lima-based BBVA Banco Continental, Peru’s second-largest bank, said in a July 1 report.
“This leaves less room for higher costs to be passed through in higher prices or second-round effects,” wrote analysts Franciso Grippa and Isaac Foinquinos.
A jump of at least 47 percent in the international price of corn, wheat and soybean in the last year propelled Peruvian food price inflation to a three-year high in March.
The annual inflation rate fell to 2.9 percent in June from 3.1 percent in May and 3.3 percent in April as lower food prices offset the higher cost of gasoline. Prices will rise as much as 0.3 percent in July, after a 0.1 percent increase last month, because of seasonal reasons, Benavides said.
The central bank expects consumer prices to rise about 3 percent this year, the least in the region.
Bets the central bank will extend last month’s pause led the yield on the nation’s 9.91 percent sol-denominated bond due May 2015 to drop 42 basis points, or 0.41 percentage point, in the past month to 5.45 percent yesterday.
Regional Response
With last month’s pause, Peru’s central bank has bucked the regional trend.
Brazil’s central bank has indicated it will increase interest rates for a fifth month in July as it seeks to curb demand, while Chilean policy makers said last month they will probably need to continue to raise rates after the economy expanded at its fastest pace since 1995 in the first quarter.
Colombia’s central bank may use other monetary instruments instead of raising rates to contain demand for credit, according to Goldman Sachs Group Inc. economist Alberto Ramos.
Source: www.bloomberg.com
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