LatinFinance - September/October 2016 - 83

is ready to lift its interest rate has a quick
impact," he says.
Peru's focus on containing inflation
elicited praise from central bank watchers. "The results of a higher-than-average
growth compared to most other Latin
American countries have been well managed with inflation under control," says
Mexico City-based independent economist
Jonathan Heath.
A recent central bank statement noted
that the consensus forecast calls for a GDP
expansion of 3.7% for 2016 and a regionleading 4.1% for next year, both above
World Bank estimates. Forecasts see infla-

Source: Reuters

tightening when called for.
Velarde has clearly distinguished between inflation pressures coming from the
more volatile supply side and those from
the demand side. For example, prices for
food, a sector that weighs heavily in the consumer price index basket, were affected by
the El Niño warm weather patterns last year.
"Velarde has been able to accurately differentiate cyclical from temporary factors
affecting inflation," says Alejandro Arreaza,
Latin America economist at Barclays Capital. "He has gradually hiked interest rates,
ensuring that inflation converges to the
target range, while allowing the economy

CLEAR DIRECTION: A central bank's indications can have "quick impact" when inflation
expectations start to rise, says Julio Velarde

to gradually recover from the recent
slowdown, pointing to register the fastest
growth in LatAm this year."
Velarde says there will always be a little
volatility that can push consumer prices
higher, which is acceptable if it doesn't feed
inflationary expectations.
"The problem that we saw last year is
that inflation expectations were starting to
increase, and we thought that controlling
inflation would be more costly afterwards.
That is why we increased the reference
interest rate in September, December, January and in February, raising it from 3.25% to
4.25%, where it is now," he says.
Central bankers have no "magic button"
to reposition inflation to a target range,
Velarde says, but fast, decisive actions give
a clear indication to investors and financial
markets the central bank is on the case.
"When inflationary expectations are
increasing, a sign that the central bank

JULIO VELARDE, PERU

"I THINK THAT WE
WERE LUCKY IN
HAVING CONTROLLED
INFLATION IN THE
LAST FEW YEARS"

tion at 3.1% this year as supply shocks ease.
For 2017 the forecast calls for the CPI to rise
2.7%, down nearly a percentage point from
last year's 3.6% increase.
One factor pushing inflation in Peru
above the central bank's target range the
past couple of years has been the depreciation of the sol. The economy still has various prices fixed in dollars, such as rent for
middle-class housing, and even some locally
produced goods. "The effects of the transfer
of the depreciation of the exchange rate on
inflation are somewhat higher than in other
countries of the region," Velarde says.
Still, from 2001 to 2015, dollarization has
declined steadily. Analysts say the reduction
in the use of dollars reflects macroeconomic
stability and prudent policies.
The central bank's war chest of net international reserves remains a solid bulwark
against speculation. Over the past five years,
reserves have risen by about $13.75 billion. Economists note that Peru, one of the
world's largest producers of precious and
base metals sold for dollars, wisely managed
the commodity boom of the last decade.
Rounding out the top spots
A runner-up who received strong support
for the award, for the second year running,
is Chile's Rodrigo Vergara. Central bank
watchers praised various factors in Chile's
nomination, including restrained inflation
(Chile's CPI rose 4.3% last year), the ability to keep the reference interest rate in a
neutral position and a lack of volatility in the
exchange rate.
"Chile is less opaque than other countries, such as Brazil, which is a major reason
inflation expectations are much more contained," says Edward Glossop, Latin American economist with Capital Economics.
Mexico's central bank governor, Agustín
Carstens, who was LatinFinance's winner
last year, also received praise. Mexico's
central bank has been able to keep inflation
expectations well anchored, despite a very
complicated scenario, with the sharp depreciation of the peso. Mexico's consumer price
index gained 2.7% in 2015.
Other central bank governors who received votes included Federico Sturzenegger
of Argentina, where the new administration
is working to tame soaring inflation, and Costa Rica's Olivier Castro Pérez, praised for the
Central American country's healthy growth
and low inflation. Costa Rica's consumer
price index rose a meager 0.8% last year. José
Darío Uribe, governor of Colombia's central
bank, also received a mention. LF
September/October 2016 - L ATINFINA NCE.COM 83

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