May 20, 2013 / 10:31 PM / in 5 years

Peru central bank may trim GDP view

LIMA (Reuters) - Lower commodities prices are crimping growth in emerging markets like Peru even as growing confidence in the U.S. economy leads some central bankers to start preparing for life after stimulus.

Most policymakers see the U.S. economy heading toward an increasingly solid recovery, especially in the second half of this year, Peru’s Central Bank President Julio Velarde said during the Reuters Latin America Investment Summit.

“The discussion is beginning to move now to one of how and when the U.S. will begin to take away stimulus,” said Velarde, referring to regional and international chats among policy makers over the past few weeks.

A year ago nobody was talking about this, he said.

Some policymakers are concerned about what will happen after years in which the Federal Reserve injected trillions of dollars into the economy - creating waves of hot money inflows into emerging markets and causing local currencies to appreciate.

“The worry is about what the impacts will be when this (stimulus) policy is reversed,” he said.

Peru’s sol currency gained nearly 6 percent last year even though the central bank bought a record $13.85 billion to curb its rally. But last week the sol hit its weakest level against the dollar in nearly two years as prices for the metals Peru exports slipped.

Velarde said one possible cause of the fall in commodities prices - besides, say, less demand from China - is liquidity that pushed them higher in recent years may start to dry up.


Regardless of the cause of the dip in commodities prices it is clear economic growth is being pinched in emerging markets like Peru, which has been one of the fastest-growers in the region.

“Right now, there will probably be a downward correction for growth,” he said. “What worries us is what’s happening in other emerging economies - things are starting to cool down somewhat.”

Julio Velarde, president of the Central Bank of Peru, attends an interview at the Reuters Latin American Investment Summit in Lima May 20, 2013. REUTERS/Mariana Bazo

Velarde said the central bank might trim its forecast for 2013 growth in Peru to 5.9 percent or 6 percent from 6.3 percent, when it issues its next quarterly outlook in late June.

“The drop in commodities prices seems to have had a bigger effect than we initially thought,” he said. “This doesn’t mean growth rates will be low, just that they will decelerate” a bit.

Inflation is on track to be around 2 percent this year, at the center of the central bank’s target, perhaps a touch lower, Velarde said.

He stressed that it is still too soon to consider altering monetary policy that has kept the benchmark interest rate at 4.25 percent for two years.

That is in part because leading indicators for the domestic economy - like electricity output, cement sales, and supermarket sales - are still quite strong and in same cases growing around 20 percent a year.

Stung by holidays that cut into workdays, Peru’s economy grew only 3.01 percent in March from the same period a year ago, the weakest monthly result since October of 2009.

But Velarde has said output should rebound in April and that the central bank is keen to see more data to better gauge the pace of expansion.

“I want to see the data for May. We are waiting for them to confirm if in fact a deceleration will occur.”

On the upside, he said the central bank expects that most metals prices, with the exception of gold, will begin to recover - which would help lift Peru’s export receipts.

And some $1.4 trillion in stimulus announced by the Bank of Japan in April could push yield-hungry investors from there to look for assets in developed and developing economies.

“There is appetite. When we have been with Japanese investors, there is a big appetite for new assets abroad,” he said. “They want to get a better return than zero percent.”

Follow Reuters Summits on Twitter @Reuters_Summits

Reporting by Teresa Cespedes and Terry Wade; Editing by Phil Berlowitz

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