Peru Currency Management Hindered by Fed Rate Policy, Central Banker Says

The Federal Reserve’s pledge to keep interest rates at record lows may undermine Peru’s efforts to contain gains in its currency as the Andean country raises borrowing costs, central bank Governor Julio Velarde said.

A widening interest-rate gap between the two countries may entice Peruvian companies to borrow dollars abroad at lower yields, boosting the amount of foreign currency they bring into the country and strengthening the sol, Velarde, 58, said in an interview in Bloomberg headquarters in New York. The sol has gained 3.1 percent this year, the third most among major Latin American currencies.

“One of the problems we may have in the future is if the Fed continues to keep interest rates too low for too long,” Velarde said. “If that continues, it will stimulate more and more big corporates obtaining their finance outside Peru and then they will send the dollars back in the country.”

Peruvian central bankers raised the benchmark lending rate by a half percentage point on Aug. 5, more than economists forecast, to 2.5 percent and boosted reserve requirements to curb inflation in the Andean country. The bank will lift the rate to 3.25 percent by year-end, according to a Bloomberg survey of nine economists. The Fed has kept the benchmark U.S. rate between zero and 0.25 percent since 2008.

Rates on dollar-denominated loans in Peru, which account for about half of domestic credit, are also climbing as the central bank raises reserve requirements, Velarde said.