Peru May Raise Rate to 4% After Prices Jump on Surging Growth

By John Quigley

Peru's central bank will probably raise its benchmark lending rate for the ninth time in 12 months today after consumer prices jumped the most in almost three years in March amid surging economic growth.

The seven-member board, led by bank President Julio Velarde, will raise the benchmark rate by a quarter point to 4 percent from 3.75 percent, according to 14 of 17 economists surveyed by Bloomberg. Three analysts expect a half-point increase. The board will announce its decision at about 6 p.m. New York time.

Surging prices for grain and crude oil risk pushing annual inflation above the central bank's 1 percent to 3 percent target range, Velarde said last week. Rising employment, wages and revenue from copper and gold exports fueled year-on-year economic growth of 10 percent in January after 2010's 8.8 percent expansion.

"The central bank is worried because the economy and inflation is so strong," said Augusto Saldarriaga, head of analysis at Banco Internacional del Peru. "Overheating is their main concern. They need to put the brakes on."

Higher food costs led consumer prices to increase 0.7 percent last month, the steepest rise since June 2008. About half the increase was due to the higher cost of imports such as corn, according to the national statistics agency. The annual inflation rate rose to a 20-month high of 2.66 percent.

Election, 'Risks'
Yields on Peruvian bonds have risen ahead of April 10's first-round presidential vote amid investor concern that former renegade army colonel Ollanta Humala may win.

The yield on Peru's 6.55 percent dollar bond due March 2037 is up 30 basis points, or 0.30 percentage point, to 5.96 percent since March 4, according to prices compiled by Bloomberg.

BBVA Banco Continental, Peru's second-largest bank, projects prices will rise 3.4 percent in 2011. Scotiabank Peru, the country's third-largest lender, expects rising food costs will push 12-month inflation to 3 percent in April and to 3.5 percent this year.

Though the central bank expects a correction in agricultural commodity prices in the second half of 2011, "the risk is these price pressures persist for longer than anticipated," said Scotiabank economist Mario Guerrero, who predicts policy makers will raise the benchmark rate by 50 basis point to 4.25 percent today.

The government is doing all it can to tame consumer prices, including a "major cut" in spending, to keep 2011 inflation at 3 percent to 3.5 percent, Finance Minister Ismael Benavides said last week.

'Super-Charged' Expansion
The government has cut the sales tax this year, lowered import tariffs on some food products, frozen fuel prices, and proposed a fuel tax cut to mitigate the rise in international grain and crude oil prices. Peru is a net importer of oil, soybeans, corn and wheat.

A "lax" fiscal policy has "super-charged" the expansion of the $153 billion economy which is in danger of overheating, Morgan Stanley said in a March 21 report.

Gross domestic product rose by close to 10 percent in February, Benavides said this week.

The central bank tightened reserve requirements for a third straight month on April 1 to rein in bank lending after credit grew 20 percent in February from a year earlier and 1.3 percent from January.

Demand for credit will slow, bringing the annual growth rate for 2011 to 16 percent, Velarde told reporters March 31.

Peru, South America's sixth-largest economy, will probably expand 7 percent this year after growing 8.8 percent in 2010, as rising private investment offsets slower growth in public spending, the central bank said last month. It previously projected 2011 growth of 6.5 percent.

The sol weakened 0.1 percent yesterday to 2.8115 per dollar from 2.8083 on April 5. The currency has declined 1.6 percent since March 20, the worst performance among 25 emerging-market currencies tracked by Bloomberg.

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To contact the editor responsible for this story: Joshua Goodman at