With the Peruvian Sol declining in value, the Central Bank of Peru is keeping the current rate of 3.25% in place for now, mainly to avoid further weakening of the currency.
Peru Keeps 3.25% Rate to Bolster Sol
The board, led by President Julio Velarde, held the key rate at 3.25 percent, as forecast by 13 of 20 economists surveyed by Bloomberg. Seven expected a cut to 3 percent. Policy makers cited growth rates below potential, slowing inflation and currency volatility as reasons for the pause.
“The most recent indicators for economic output and consumer and business confidence continue to show a weak economic cycle,” the central bank’s board said in a statement on the central bank’s website.
Policy makers eased reserve requirements on March 1 for the 10th time in the last year as the economy expands at its slowest pace since 2009. While Peru has the lowest inflation among major Latin America economies, interest rates are at a four-year low and further cuts could fuel additional sol weakness, which the central bank is fighting in the currency market, said Mario Guerrero, an economist at the local unit of Bank of Nova Scotia.
The central bank has sold $1.2 billion in U.S. dollars in the currency market this month to bolster the sol. A weaker sol makes it more expensive for Peruvians to pay back U.S. dollar loans using soles and boosts the cost of imported goods.
Policy makers lowered the benchmark rate at their January meeting, their third reduction in the last year. The board is ready to consider additional easing measures if needed, it said in Thursday’s statement.
Strong Dollar Limits Options
The Peruvian Sol has declined over 9.5% in the last year, so the Central Bank has few options as 50% of the countries debt (corporate/government/private) is denominated in dollars. Each weakening of the Sol vs the Dollar results in higher borrowing costs. Import prices rise and further rate cuts will only exacerbate the problem. See Peruvian Sol Breaks Psychological $3.10 Barrier, Inflation in Appliances.
Chile Also Keeps Rates Steady
Chile’s central bank board kept the benchmark interest rate at 3 percent Thursday, as forecast by all 24 economists surveyed by Bloomberg. Peru’s central bank maintained its key lending rate at 3.25 percent, as forecast by 18 of 20 economists. Two analysts expected a quarter-point cut to 3 percent.
The two Andean economies likely expanded at the slowest pace in five years in 2014 after a slump in prices for copper, their main export, damped investment and consumer demand. High inflation in Chile and currency weakness in Peru may persuade policy makers in both countries to keep rates on hold in the coming months, said Pedro Tuesta, a Washington-based economist at 4Cast Ltd.
Chile’s central bank has paused after cutting rates eight times in the 12 months through October as inflation exceeded the target range for 10 consecutive months.
©2015 Ben Gangloff
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