Peru Can Keep Rates on Hold as CPI Slows, Velarde Says

Peru’s central bank probably will keep its benchmark interest rate unchanged at 4.25 percent next week as growth moderates and inflation is seen slowing from a two-year high, bank President Julio Velarde said.

“We don’t see any reason in principle to change the monetary policy stance,” Velarde said in an interview in Cuzco, Peru. “Inflation expectations are well anchored” within the central bank’s target range, he said.

Consumer prices climbed faster than economists expected last month on rising food and fuel costs, indicating that the central bank has little room to relax monetary policy to mitigate the impact of slower global growth. The annual inflation rate rose to 4.64 percent, the highest since April 2009 and up from 4.2 percent in October. The central bank targets inflation of 1 percent to 3 percent.

Food prices rose as the La Nina weather pattern affected yields of local crops and after imported soybean, corn and wheat prices surged in the first half of 2011, Velarde said. The bank doesn’t expect a rise in grain prices next year.

The central bank increased its benchmark rate five times between January and May, pushing it to a two-year high, to contain inflation expectations. The bank has kept rates on hold since June as the economy slows. The board next meets Dec. 7.

“The pause was initially due to concern about the political context affecting demand and also because of the international situation,” Velarde said. “Looking ahead, we don’t see any demand-related pressures nor any of these pressures from foods” that would cause inflation to accelerate, he said.

Global Question

Private investment spurred by surging metal prices led to an average 7.2 percent growth in Peru in the last five years. Growth slowed for a fifth straight quarter in the July-through- September period as flagging demand for the country’s exports and global market turmoil damped investment.

The economy expanded an annual 6.5 percent in the third quarter, compared with expansion of 7.9 percent in the first half of the year, the national statistics agency said Nov. 28.

“We don’t see a significant slowdown yet,” Velarde said. Growth will slow next year “more because of international uncertainty” he said.

The suspension of the $4.8 billion Minas Conga copper and gold project following anti-mining protests won’t harm growth unless other mine investments are also halted, Velarde said.

Cia. de Minas Buenaventura SAA (BVN) and partner Newmont Mining Corp. agreed Nov. 29 to a government request to suspend work on the project following environmental protests by communities concerned the mine will curtail water supply.

The yield on the nation’s 7.84 percent sol-denominated bond due August 2020 fell two basis points, or 0.02 percentage point, to 5.66 percent at 2:40 p.m. Lima time, according to prices compiled by Bloomberg.

Alex Emery and John Quigley - Bloomberg

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net.