Interview : Julio Velarde Flores
Are interest rates likely to change in the near term?
JULIO VELARDE FLORES: Most market participants do not expect additional cuts in the BCRP’s benchmark interest rate. Between May 2017 and March 2018 the bank decreased its policy rate six times, from 4.25 % to 2.75% – or 0.5% in real terms. The current real interest rate level implies an expansionary monetary stance consistent with inflation convergence towards the middle point of the BCRP’s target by end-2018, as well as cyclical GDP recovery from below potential growth. Future changes in the policy rate will depend on new information.
How much market volatility can be expected due to the US Federal Reserve’s policy normalisation?
VELARDE: In 2017 the US Federal Reserve increased its policy rate several times without causing disturbances, as they were in line with market expectations. The three increases in 2017 resulted in capital flows to emerging market economies and appreciation of their currencies. The US Federal Reserve has learned from its experience of the end of monetary stimulus in May 2013, which resulted in global uncertainty because its rationale was not communicated in a transparent manner. Hence, the BCRP does not foresee anything similar happening in the near future.
Meanwhile, the European Central Bank continues to conduct an expansionary monetary policy, and the Bank of Japan has not signalled any policy adjustments, which will likely support more expansionary financial conditions and a search for yields at a global level, in turn potentially encouraging capital inflows to emerging market economies. This could benefit countries with solid macroeconomic fundamentals, such as Peru.
What is the outlook for the budget and trade?
VELARDE: The fiscal deficit is expected to be around 3% of GDP in 2018 due to necessary reconstruction investment in areas affected by El Niño floods in 2017. However, the Ministry of Economy and Finance has announced consolidation efforts, beginning in 2019, to reduce this to 1% by 2021. At 24%, Peru’s debt-to-GDP ratio is moderate, and one of the lowest in South America, which should facilitate consolidation in the coming years. Nevertheless, efforts must be implemented gradually so as not to affect the ongoing cyclical recovery.
Trade surpluses are to be expected in the coming years. Export volumes and prices have increased since 2016, resulting in a $6.26bn surplus in 2017, the largest in five years. Even non-commodity exports, such as avocados and blueberries, have grown considerably.
Notably, copper production doubled between 2013 and 2017, with several mining projects in development and others in the pipeline. This potential, combined with rising demand from international markets, indicates that Peru’s exports should continue to grow. As a result of these trends, the current account deficit fell from 4.8% of GDP in 2015 to 1.3% in 2017.
Should the BCRP regulate cryptocurrencies?
VELARDE: It is important to point out, at the outset, that cryptocurrencies are not currencies, but rather financial assets with the potential to attract speculative behaviour. The BCRP has therefore warned that it is not responsible for regulating them. Importantly, the price differences across cryptocurrency trading platforms suggest a lack of arbitrage, meaning that transaction volumes are not sufficient to balance prices.
Why have deposits in private banks been increasing?
VELARDE: Bank deposits were up 11.5% year-on-year in June 2018 due to the ongoing cyclical economic recovery, which is being further enhanced by favourable external factors such as a rebound in exports, an increase in mineral prices and an upward trend in mining investment. Deposits have also benefitted from accelerated credit growth, which rose from 4.7% to 9% in the 12 months to June 2018, favoured by a moderation in interest rates and lower reserve requirements.
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