Peru - Economic Briefing October 2004

Fishing Overtakes Mining as Main Driver (continued)

Outlook remains solid as Camisea project will bolster growth in second half
Consensus Forecast panellists remain upbeat about growth prospects and the economy is seen as experiencing yet another year of robust growth.  In the second half, economic activity is expected to accelerate to 4.3% from 4.2% in the first half, as external demand continues to thrive and the giant Camisea project will add momentum.  For the full year, GDP should grow by 4.2%, unchanged from last month’s forecast.  The second-half boost should also provide a solid backdrop for continued robust growth next year, which is anticipated to reach 4.0%, up 0.2 percentage points from last month.

Headline inflation drops in September but remains well above target rate
In September, consumer prices remained virtually unchanged.  The reading was in line with last month’s Consensus Forecast figure, which saw prices to increasing by 0.04% versus the actual 0.02%.  The price stability observed in September represented the second consecutive month of price stability.  Higher prices for housing, fuels and electricity as well as transport/communications and education/cultural activities were offset by lower prices on food and beverages.  As a result of the moderate price development in September, annual headline inflation dropped 0.6 percentage points to 4.0%.  The decline in annual headline inflation is putting an end to the rapid rise registered since April, when inflation shot up by 1.8 percentage points to 4.6% within four months.  Despite the decline, inflation remains well above the Central Bank’s 1% tolerance margin around the 2.5% central target.   Core inflation, which excludes the erratic effects of volatile categories such as fresh fruits and vegetables as well as fuels, is developing more favourably.  In September, the core inflation index was also virtually unchanged (+0.02%) and annual core inflation remained at 2.8%. 

Inflation likely to drop by end of the year
The Central Bank projects that inflation will drop in the coming months to finish the year close to the upper end of the tolerance margin.  In 2005, monetary authorities hope to return to the centre of the target range.  The Bank expects core inflation to be slightly above the mid-point of the range in both years.  Consensus Forecast participants have reflected the recent price pressures by raising their year-end 2004 inflation forecast another 0.2 percentage points over last month to 3.2%, well above the Central Bank’s target but just a notch above the border of the tolerance margin.

Central Bank tightens policy to stem inflationary pressures
In order to stem the inflationary pressures, the Central Bank raised the reference interest rates of the monetary operations by 25 basis points on 7 October.  This implies that monetary operations via the injection and withdrawal of liquidity by auction will be executed to maintain the interbank interest rate around the centre of the corridor of 3.0%, as set by reference interest rates.  For direct repos and monetary regulation credits, the rate was raised from 3.50% to 3.75% and for overnight deposits, interest rates went up from 2.00% to 2.25%.