March 11, 2010, 6:56 AM EST

March 11 (Bloomberg) — Peru’s central bank will probably keep its benchmark lending rate at a record low for a seventh month as below-target inflation allows policy makers to focus on fueling economic growth.

The seven-member board, led by bank President Julio Velarde, will keep its reference rate at 1.25 percent, according to all eight economists surveyed by Bloomberg. The bank is scheduled to announce its decision after 6 p.m. New York time.

Policy makers last year slashed borrowing costs by 5.25 percentage points in a bid to pull the economy out of its deepest contraction in eight years. The central bank will probably extend the current pause to spur company spending and allow the economy to consolidate its recovery, said Hugo Perea, the chief economist for Peru at BBVA Banco Continental.

“The bank has room to maintain a flexible monetary policy,” Perea said in a phone interview from Lima. “Recent inflationary pressure has been caused by seasonal factors and doesn’t pose a threat.”

Peruvian consumer prices climbed 0.32 percent in February from January on higher costs for food and electricity. Annual inflation was 0.84 percent, below the bank’s 1 to 3 percent target range.

Brazil, Mexico and Chile have all kept their benchmark rates unchanged since last cutting in July, citing tame inflation and improving economic growth. Peru cut the overnight rate over seven consecutive meetings to spur consumer spending after six increases the year before pushed borrowing costs to the highest since 2001.

Fiscal Stimulus, Investment

The central bank’s rate cuts began to be reflected in economic data in the second half of 2009 after the economy shrank for the first time since 2001 in the second quarter.

The National Statistics Office is scheduled to publish its January economic growth report March 15, with economists expecting a year-on-year expansion of 5.5 percent, according to the median of five forecasts compiled by Bloomberg.

The economy grew 6.4 percent in December from a year earlier, the fastest pace in 14 months, as construction surged on rising public and private investment.

Government spending has surged as policy makers attempt to cushion the impact of a 15 percent contraction in private investment with spending under a $3 billion stimulus package.

Government services accounted for 2.47 percentage points of December’s rise in gross domestic product, according to the statistics office.

Peruvian private investment contracted at a slower pace in the fourth quarter compared with the two preceding quarters, the central bank said. Peru’s internal demand rose 0.5 percent in the fourth quarter, the first increase since 2008.

Rebound, Tame Inflation

Peru’s trade surplus narrowed in January as imports rose to their highest level since 2008.

in January, cement demand, the principal indicator of construction output, rose 11 percent from a year earlier as companies built more homes and malls and advanced electricity, mining and road projects, the statistics office said.

Mining, oil and gas and agricultural output also grew at a faster pace. Stronger demand for power caused electricity output to grow 5.8 percent.

“Exports have been much better in the first two months of this year,” Juan Varilla, president-elect of exporter group Adex, said in an interview in Lima. “Agricultural exports in particular are expected to see significant growth.”

The central bank doesn’t see any need to increase its reference rate in the short term, Velarde said March 3. Rates won’t rise until the bank sees “vigorous and sustained” economic growth causing inflation to accelerate, Velarde said.

Credit, Taxes, Metals

Any increase in interest rates would be small to begin with, Velarde said. The bank doesn’t rule out adjusting reserve requirements as the first step in a gradual withdrawal of its monetary stimulus, he said.

The central bank might opt for higher reserve requirements to avoid the strong inflow of capital that could be triggered by an increase in Peru’s reference rate, according to Perea.

Peruvian companies and individuals increased borrowing 9 percent in January, led by small business and mortgage loans, the central bank said.

Tax income rose 17 percent to 5.73 billion soles ($2 billion) in January on surging economic growth, the country’s tax collection agency Sunat said.

Prices of copper, zinc, lead, tin and silver, which account for 60 percent of Peru’s export revenue, have all gained at least 10 percent in the past month as U.S. and Chinese manufacturers boost demand for industrial materials.

Metals Output

The Andean country is the world’s largest silver producer, second largest for copper, third-largest for zinc and tin and sixth-largest for gold.

The Peruvian sol yesterday finished trading at 2.8385 per dollar, its strongest level since August 2008 as the start of a tax season boosted demand for the local currency by exporters repatriating profits from foreign markets.

The sol has gained 1.7 percent this year, the eighth-best performance against the dollar among 26 emerging-market currencies tracked by Bloomberg.

The sol’s appreciation has led the central bank to buy $1.7 billion in the foreign-exchange market so far this year, exceeding the $1.26 billion purchased in all of 2009.

The country’s benchmark stock index, the Lima General Index, has risen more than 100 percent in the past 12 months — the 16th-best performance among 92 primary equity indexes tracked by Bloomberg worldwide — closing at 14,346.8 yesterday

–Editors: Robert Jameson, Brendan Walsh

-0- Mar/11/2010 05:00 GMT

To contact the reporter on this story: John Quigley in Lima at jquigley8@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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