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Velarde sees no limit on Peru central bank purchases
John Quigley for Bloomberg
April 28, 2012
Peru’s central bank sees no limit “in the short term” to how many dollars it can purchase to stem gains in the sol as its currency trades at a 15-year high, bank President Julio Velarde said.
The sol’s 2.3 percent advance this year and 20 percent in the past five years stems from foreign investors buying sol- denominated government debt and households and companies shifting their savings to the local currency from dollars, Velarde said on a conference call with investors today.
The central bank has bought $7.7 billion in the spot market this year to soak up the additional supply, helping swell international reserves 17 percent to $57.5 billion at the end of April. After buying dollars the central bank issues sol certificates of deposit locally to drain the extra soles from the economy through a process known as sterilization.
“I don’t see limits in the short term to the purchase of dollars because of sterilization factors,” Velarde said. “If we couldn’t sterilize because we were worried about inflation, we could also consider increasing reserve requirements.”
Peru’s sol rose 0.5 percent to 2.6375 per U.S. dollar this week, from 2.6510 on April 20, the steepest gain since the five days ending Dec. 2, according to Deutsche Bank’s local unit. The currency gained 0.2 percent today and last traded below 2.64 in December 1996, data from Peru’s financial regulator show.
The central bank is more concerned about sudden depreciation in the sol than it is by appreciation because of the effect on the banking system, where about 44 percent of all loans are denominated in dollars, Velarde said.
The sol’s appreciation and the comparatively lower interest rates for dollar deposits are encouraging companies and households to save in the local currency, according to the country’s bank association. Dollar deposits fell 1.4 percent to in March from February while sol-denominated deposits climbed 3.8 percent.
The central bank isn’t considering applying currency controls “of any kind” to slow the sol’s appreciation, Velarde said.
“If people are betting that currency is going to be appreciating always, probably they’ll be mistaken” at some point, he said. “I don’t know how much we’re going to acquire. You can consider that there might be some limit, but we don’t see it at this time.”
Velarde said he’s confident Peru’s annual inflation rate will be within the target of 1 percent to 3 percent before the end of the year. A decline in wholesale chicken prices this month has yet to be passed through to consumers, he said.
Consumer prices rose 0.77 percent in March, the fastest pace in eight months, as the cost of chicken jumped 8.8 percent and fuel prices rose. The annual inflation rate held at about 4.2 percent.
South America’s sixth-largest economy may expand as much as 6.2 percent this year, fueled by private investment growing by more than 10 percent and “strong” public investment, he said. Demand for housing is boosting growth as the nation’s middle class expands and formal employment climbs, he said.
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