Peru Bank May Cut Interest Rate to 4% as Domestic Demand Stalls
Peru’s central bank will probably cut its benchmark lending rate for a fourth straight month today as slowing inflation allows policy makers to lower borrowing costs and bolster flagging domestic demand.
The seven-member board, led by bank President Julio Velarde, will lower its reference rate to 4 percent from 5 percent, according to nine of 16 economists surveyed by Bloomberg. The others expect cuts ranging from 0.5 point to 1.5 points.
The global financial crisis has choked demand for Peru’s exports and curtailed domestic spending, reining in economic growth and consumer prices. The slowest economic expansion in eight years, monthly inflation near a two-year low and the strongest exchange rate since September should persuade the bank to match last month’s 1-point rate cut, said Alejandro Cuadrado, an economist at Banc of America Securities-Merrill Lynch.
“We’ve seen a rapid collapse of economic activity, the strengthening of the sol and inflation coming down faster than expected,” Cuadrado said in a telephone interview from New York. “All this points to more room for rate cuts.”
Monthly inflation in Peru was 0.02 percent in April, slowing the annual rate to 4.64 percent, down from a decade-high of 6.75 percent in November on moderating food and fuel prices.
The 0.41 percent rise in consumer prices through April is Peru’s lowest year-to-date inflation rate for the first four months of a year since at least 1991.
Inflation will slow to 2 percent this year on falling commodity prices, according to the central bank, within policy makers’ target of 1 percent to 3 percent.
Demand, Growth
Slack demand for imports has pushed up the country’s trade surplus, which coupled with rising investment inflows has fueled a rally in Peru’s sol, easing the threat of inflation, Velarde said May 4. The bank may cut “aggressively” today, he said.
Since depreciating to its weakest in more than two years on March 3, the sol has strengthened 9.9 percent. The currency has gained 5 free credit score.9 percent this year, the fifth-best performance against the dollar among 27 emerging-market currencies tracked by Bloomberg.
After expanding 9.8 percent in 2008, Peru’s economy has stalled, expanding just 0.2 percent in the year through February, the slowest pace in eight years.
Falling commodity prices may cut economic growth to 4 percent in 2009, according to the Finance Ministry.
‘Less Appetite’
The government may tap International Monetary Fund credit lines and take on additional World Bank loans to cope with the effects of the global economic slump, Peruvian Finance Minister Luis Carranza said April 28.
“There’s less appetite for investment, which is hurting government revenue,” Carranza said. “There’s still uncertainty, and there won’t be an immediate economic recovery.”
Lower interest rates can help prompt businesses to invest and consumers to buy on credit. Cheaper loans also can spur inflation by strengthening demand.
Last year, policy makers raised the reference rate six times to 6.5 percent, the highest since 2001, in a bid to slow the fastest inflation since mid-1998.
Prices of copper, zinc, tin and silver, which account for 60 percent of Peru’s export revenue, have all dropped at least 22 percent since early July on declining demand.
Exports fell for a sixth month in March, dropping 23 percent to $2.05 billion, according to state exporter association ComexPeru.
Growth may start to rebound in the third quarter as the economy feels the effects of previous rate cuts and increased public spending, said Pablo Secada, an economist at the Peruvian Economy Institute.
“The bank will probably push through further rate cuts this year to send a signal to the market,” Secada said in a telephone interview. “But it’s not a crisis scenario.”
Filed under: finance by Finance Boss