Peru Sol Rebounds as Central Bank Chief Velarde Agrees to Stay
Peru’s sol rebounded from a record low after central bank President Julio Velarde agreed to stay in the post for another five-year term.
Velarde, 69, has been in the role since 2006, and is popular with investors for having overseen a long period of relatively strong growth and low inflation.
After a series of conversations with new Finance Minister Pedro Francke about extending his tenure, the decision was made Monday afternoon, according to a person familiar with the matter who isn’t authorized to speak publicly. Peru’s new president, Pedro Castillo, had been expected to meet Velarde in Lima Tuesday but was postponed at the request of the government palace, according to people with direct knowledge of the matter. The meeting hasn’t yet been rescheduled.
The sol strengthened 0.9% to 4.07 per dollar in Lima, the second-biggest increase in emerging markets Tuesday after Brazil’s real. The iShares MSCI Peru ETF gained 1.2% to snap five days of declines.
His continuity at the central bank should help preserve a sense of stability at a time of acute market volatility due to questions over Castillo’s policies. The nation’s currency has been the worst performer in emerging markets since Castillo took office on July 28.
“It’s another step in the right direction and should calm investors’ nerves further,” said Omotunde Lawal, the London-based head of emerging-market corporate debt at Barings LLC, who is underweight Peru. “The budget will give us more clues, but with Velarde staying it’s certainly a good omen.”
The central bank declined to comment.
As well as Velarde, the bank’s other six board members still need to be named in the next few weeks. The government appoints four of them, including Velarde, and congress will name the other three. Francke said in an interview with local TV that former central bank president Oscar Dancourt is being considered for a seat on the board.
But there’s a risk that Castillo and congress will appoint people who are not suitable for the position, according to economist Jorge Gonzalez Izquierdo.
“The board of directors could be non-homogeneous, in which case nothing guarantees what sort of monetary and financial policies the central bank will have,” Gonzalez said. “I think Velarde is betting that at least three directors that the president names will be in line with him.”
Castillo surprised the market with his cabinet picks which came prominently from the leftwing elements of his alliance including for the prime minister and foreign minister roles. Francke, who was the preferred choice for finance minister, sought assurances from Castillo before accepting the role.
Castillo says that he plans to rewrite the constitution, spend heavily on health and education and to increase the tax burden on the key mining industry.
There are still questions about whether the central bank will be able to do much about expansionary fiscal policies and what the exact mix of the new board will look like, according to Esther Law, a senior investment manager for EM debt at Amundi Ltd. in London.
“I prefer to wait for some stabilization before re-engaging,” she said.
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