A slowdown is palpable in most of the Latin American nations and Peru is no exception. Most of Central and South American countries are rich in commodities which are presently exhibiting a downtrend. Peru was South America’s fastest growing economy having expanded at an average rate of over 6% per annum since 2002 with moderate inflation.
However, the economy has recently slowed down due to a decline in prices for commodities. Notably, Peru is a large producer of precious metals and China is the major user. A slowdown in China has consequently resulted in the sluggish performance by the Peruvian economy.
China normally accounts for about 17% of Peru’s exports. Economic growth in Peru was 5.02% in 2013 indicating the slowest rate in four years (read: 3 Industrial Metal ETFs to Buy Amid Weak Global Trends).
The GDP in Peru expanded 1.70% year over year in Q2 from an average 6.3% expansion in the last decade, per Bloomberg. Exports plunged to the lowest level in four years. Investment fell 3.2% in Q2. The private investment slump in Q2 came for the first time in five years.
Thus, to boost the economy, Peruvian Central Bank slashed its borrowing costs to 3.5% on September 11, 2014. Prior to this, the central bank cut its key interest rate by 25 bps to 3.75% in July. Before that, the central bank lowered the key rate in last November after more than four years.
However, consumer prices suddenly nosedived, pushing the annual inflation rate down to the targeted central bank range for the first time in 2014, per Bloomberg. Consumer prices dipped 0.09% in August, a poor trend considering that the central bank’s inflation target is 1% to 3%. The bank expects inflation at around 2% against a projection of 2.8% for 2014. This outlook enables the central bank to go for more accommodative monetary policy, if needed.
The rate cut was probably needed to boost growth as the central bank trimmed its GDP forecast for 2014 from 4.4% to 4% last month. Also, with the greenback climbing and presently hovering around the multi-year highs against the yen, we are likely to see more commodities slump. Commodity-rich Peru has seen weakness in copper and gold prices leading to a drop in mining investments.
What to Expect Ahead?
A drop in inflation came as a boon to Peru as this could prompt further easing in the nation. The central bank believes that through such a stimulus, Peru will be able to clock about 5.8% growth next year. Apart from this, the central bank purchased dollars in August to depreciate its currency against the U.S. dollar, as noted by Bloomberg. A weakening in the currency’s value would give another boost to this export-oriented economy.