Peru - Economic Briefing January 2002

Deflation as Mining-induced Recovery Is Spreading (continued)

December consumer price drop prompts deflationary year in Peru

In December, consumer prices dropped by 0.09%.  The price decline represented the fifth deflationary month this year and follows on the heels of an even more pronounced 0.49% decline registered in the month of November.  As in November, the downside pressure on prices resulted principally from food and beverages, which account for more than half of the weight in the consumer price index.  A strong drop in housing and electricity prices added additional downside pressure whereas the transport and communications category exhibited marked upside pressures.  As a result of the negative price movement, the annual rate of consumer price variation turned from 0.1% growth to a 0.1% decline.  The deflation registered in 2001 marks the first such year in over four decades.  The core inflation rate, which excludes more volatile price categories such as oil and fresh fruits and vegetables, remained in positive territory albeit at a very low rate of 0.7%.  Producer prices, which entered into deflation two months earlier, also remain under pressure.  In December they declined almost half a percentage point and the annual rate of producer price variation now stands at -2.2%.  Panellists expect the more benign economic environment to put some upward pressure on prices. 

Nuevo Sol finishes year as one of the strongest currencies against the US$

The Nuevo Sol finished the year at 3.45 against the US$, which represents a nominal appreciation of 2.1%.  This makes the Nuevo Sol one of the strongest performing currencies in Latin America in 2001, just behind the Mexican Peso.  The announcement of default and devaluation in Argentina did not trigger any negative consequences in the Peruvian markets, as the contagion remained largely absent throughout the whole region.  As a result, the currency finished at 3.48 versus the US$ on 11 January.  In 2002, panellists continue to expect a strong currency, albeit with a slight nominal depreciation. 

Interest rates drop to decade low amid deflation

Interest rates also remained stable as the Argentina crisis unfolded and the Central Bank certificate rate (CDBCRP, Certificados de Depósito del BCRP) even dropped from 9.1% in November to 7.5% in December, as the declining inflation trend dominated interest rate developments.  The current level represents the lowest level reached in more than a decade.  Given expectations of a moderate economic expansion this year, interest rates are likely to pick up somewhat towards the end of the year. 

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.