IKN

Trifles light as air

Peru sees macroeconomic in-fighting

Back last week (while commenting on the normal level of dumbassery displayed by economists regarding Peru) we noted that the Central Bank, headed up by Julio Velarde, was worried about the overheating of the economy. This is why they raised rates from 2% to 2.5% of course, but the thing that caught mine eye at the time was the phrase used in the communique that mentioned public spending was causing inflation. Here’s the snippet of snark from that IKN post:
Particularly interesting is the bit about accelerated public spending causing inflationary pressures….hey, you’d never know Peru is in an election year, would you?
With that background, let’s check this Reuters note (that displays great insight, must be said) about how Peru’s FinMin Araoz is opposed to the Peru CenBank position and is pushing to keep public spending at high levels.

LIMA, Aug 10 (Reuters) – Peru’s finance minister on Tuesday bristled at a suggestion by the central bank that she slow spending to curb inflation and vowed to meet her fiscal target for this year in one the world’s fastest-growing economies.

‘If there were no public investment then we would unnecessarily be putting the brakes on the economy,’ Mercedes Araoz told reporters. ‘Our fiscal deficit this year will be 1.6 percent of gross domestic product. Next year it will be 1 percent.’

The central bank, citing a surge in public spending and sizzling domestic demand, raised its benchmark interest rate by more than expected last Thursday to 2.5 percent from 2 percent. It was the biggest increase of the current tightening cycle in an economy investors see growing about 7 percent this year.

The next day, its monetary policy director, Jorge Estrella, said: ‘The finance ministry will need to start stepping on the brakes to gradually reduce spending and in this way help domestic demand grow in a more sustainable way.’

Araoz, who on Tuesday responded publicly to the central bank’s comments for the first time, said there were no signs the economy was overheating.

Public investments rose 65 percent in the first half of this year from the same period a year ago, though that pace should slow to 20 percent in the second half of this year as the government is winding down its economic stimulus program launched last year, said Araoz.

She ruled out criticism from the opposition that President Alan Garcia wants to ramp up spending before regional elections later this year.

SPECULATIVE CAPITAL

At the same time, Araoz issued a warning that too much monetary tightening could attract more short-term capital to Peru, which has been flooded with dollars this year, pushing the sol to a two-year high of 2.80.

‘You have to make sure that the interest rate is not raised too much, so as not to make it so attractive to speculative capital, this is a measure that the central bank will have to study at the appropriate time,’ she said.

The central bank has repeatedly intervened on the local foreign exchange market this year to soak up excess liquidity, buying nearly $6 billion since January to prevent currency volatility, which could contribute to inflation if the sol were to sharply reverse direction after excessive strengthening.

In recent weeks, the finance ministry has said it would complement the interventions with purchases of its own.

Araoz said there were no signs Peru’s economy is overheating. Inflation in the first seven months of this year was 1.79 percent. The central bank’s annual target range is between 1 percent and 3 percent.

Along with Brazil, Peru is expected to grow the fastest in Latin America this year.

Peru’s economy grew more than 9 percent in the second quarter as its construction and finance sectors expand at double-digit clips, swifter than the traditional engine of mining exports.

Araoz said her office plans to upwardly revise its 2010 growth forecast, which at 5.5 percent is well below more optimistic projections by lenders and the International Monetary Fund.

‘It would be around 6 percent, something like that,’ she said.

Once again, politicians care more about the short-term feelgood reflection of a higher GDP rate (which in itself is a dubious metric for measuring a country’s progress) than being economically responsible and checking back growth to a sustainable level. Viva freakin’ investment grade, peeps.

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