Peru Central Bank Head Signals Rates May Stay on Hold Next Week

(Bloomberg) -- Peru’s central bank President Julio Velarde indicated that policy makers were unlikely to cut interest rates next week, even though inflation may briefly drop below the target range in March for the first time in seven years.

Before reducing borrowing costs in September, July and May, “we were almost saying we were probably about to cut next month -- we have not said that in the last communique,” Velarde said in an interview in London.

Peru’s inflation rate fell for the second consecutive month in October, reaching 2 percent, the mid-point of the target range, largely due to a decline in food prices that had spiked after floods early in the year. Price-growth may fall even lower. Inflation in March was the fastest in more than two decades, so the year-on-year comparison at the same month next year will lead to a low reading, Velarde said.

“We expect inflation to finish around 2 percent this year and next, with the lowest point probably being March next year and that will be around 1 percent, maybe slightly below,” Velarde said. “It’s not important because in the next two months it’ll probably be above 1 percent again.”

The recent decline in inflation is not yet fully reflected in analyst expectations, the central bank president said. Economists expect consumer prices to rise 2.81 percent over the next 12 months, according to a bank survey last month. The next survey is due out today.

The central bank will watch the “evolution in activity, inflation expectations and inflation itself” for its rate decisions in the next few months, Velarde said.

Policy makers maintained the benchmark lending rate at 3.5 percent on Oct. 12, matching the estimates of 10 of 12 economists surveyed by Bloomberg, as they weigh the impact of the three rate cuts in the previous five months and growing evidence an economic recovery has taken hold.

The government expects the economy to grow 4.2 percent next year, up from 2.8 percent in 2017.

“Investors are seeing signals of growth in demand and growth itself so they are responding to that, and there’s a change in expectations which is driving more investments,” Velarde said.

A rally in metal prices, especially copper and zinc, coupled with capital inflows into emerging markets, helped the Peruvian sol gain 3.3 percent so far this year, the third-best performance among Latin American currencies. The current level “seems to be close” to fair value, Velarde said.

--With assistance from John Quigley

To contact the reporter on this story: Katerina Petroff in London at kpetroff@bloomberg.net.

To contact the editors responsible for this story: Christopher Kingdon at ckingdon@bloomberg.net, Philip Sanders

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