Peru’s Central Bank Will Probably Keep Rate at Record Low 1.25%

By Alex Emery and John Quigley

Oct. 7 (Bloomberg) -- Peru’s central bank will probably keep its benchmark lending rate at a record low as policy makers evaluate signs that an economic recovery has taken hold.

The seven-member board, led by bank President Julio Velarde, will keep its reference rate at 1.25 percent, according to 11 of 12 economists surveyed by Bloomberg. The bank is scheduled to announce its decision after 7 p.m. New York time.

Velarde will pause for a second month, after seven straight cuts earlier this year, to measure the effect of lower borrowing costs on the country’s economy, said Pablo Secada, an economist at the Peruvian Economy Institute. Growth is showing signs of rebounding after the economy stalled in the first half of the year on falling export demand and weaker domestic spending.

“The central bank is aware that the economic recovery has begun, even if it’s moderate,” Secada said in an interview from Lima. “We’re seeing growth in consumer demand, so they have cause not to be pessimistic.”

Brazil, Mexico and Chile have all held their benchmark rates unchanged since August, citing improving economic growth. Peru cut the overnight rate by 5.25 points this year to spur consumer spending after six increases in 2008 pushed borrowing costs up to the highest since 2001.

Peru’s metals output, agriculture and cement sales all increased in August, and unemployment was 8.3 percent that month, down from an almost two-year high of 9.3 percent in March. The improved numbers came after the economy shrank for the first time in eight years in the second quarter.

Metals Pricing

Prices of copper, zinc, lead, tin and silver, which account for 60 percent of Peru’s export revenue, have all gained at least 35 percent this year as increases in U.S. and Chinese manufacturing signal rising demand for industrial materials.

“The market is very promising for business in general,” said Norberto Lassner, president of Neogas Peru, a compressed natural gas distributor that inaugurated a $5 million filling station outside Lima last week. “There’s a great deal of repressed demand.”

Bank loans grew 15 percent this year through September from a year earlier spurred by mortgages and car loans, according to Peru’s banking regulator. Corporate debt offerings totaled 400 million soles ($140 million) in September, the highest monthly figure in two years, securities regulator Conasev said.

Peru’s foreign debt rating was put on review for an increase to investment grade by Moody’s Investors Service last week, citing the country’s “stable” economic policies.

Slowing inflation

The bank may cut the rate by 0.25 point as inflation hovers at a two-year low and Peru’s currency strengthens, said Kathryn Rooney, an emerging-market analyst at Bulltick Securities Corp. The Peruvian sol has advanced 9.5 percent this year, the seventh-best performance against the dollar among 26 emerging- market currencies tracked by Bloomberg.

The country’s annual inflation rate fell in September to 1.2 percent from 1.87 percent through August as food and transport costs declined.

The inflation rate will be lower than policy makers’ target of 1 percent to 3 percent this year on declining consumer demand, Velarde said last month.

Still, after expanding 9.8 percent in 2008, the fastest pace in 14 years, Peru’s economic growth may slow to 1.8 percent in 2009, the slowest pace since 2001, Velarde told reporters in Lima on Sept. 18.

“Domestic demand is taking longer to pick up than expected,” Rooney said in a telephone interview from Miami. “Data shows growth woefully below potential.”

To contact the reporters on this story: Alex Emery in Lima at aemery1@bloomberg.net; John Quigley in Lima at aemery1@bloomberg.net.