All week we were fed the line that the Peru central bank wouldn't raise interest rates cos "they have it under control" and "they have other ways of reigning in inflation" and all sorts of fruitfly analysis, so thanks to the good coverage at bloomberg this week (errr...watch out Reuters, bloomie's getting sharper on the country) we can see how it played out:
April 10 (Bloomberg)
".......The bank's board today will leave the reference rate at 5.25 percent, the highest since 2001, according to 10 of 12 analysts surveyed by Bloomberg. Two analysts expect the rate to increase by a quarter-point for a second time this year......"
Looking good, and the Peruvian Nuevo Sol (PEN) had just got stronger and stronger those last few days.
April 10 (Bloomberg)
".....Peru's central bank unexpectedly raised its benchmark lending rate to 5.50 percent in a bid to control the steepest inflation since 1999...."
Which knocked the PEN back at bit. But then the real fun started and the PEN made the move you can see at the end of that chart, cos Velarde and his suits at the Peru central came out with a real doozy, tripling retentions on foreign capital inflow. He raised the reserve requirement on foreign accounts from 40% to 120%. Strangely enough, not a single interviewed analyst saw that one coming...........
A quick explanation: Y'see, before a foreigner could send U$100 over and put it all in PEN or Peru bonds or time deposit accounts or whatever she or he fancied. They'd make interest on the deposit, then also make money on when he changed his cash back to dollars cos the Sol was rising fast (check that currency chart again). But then in Feb 2008 central the bank slapped a 40% reserve requirement on non-Peruvians, meaning that if you wanted to invest U$100 in soles, you'd have to send U$140 over and the U$40 would just sit there in dollars doing nothing. And now, that requirement is U$120 sitting there doing nothing if you want to invest U$100 in the Peru system.
Bye bye hot money, hello sexyworld of capital controls.
But those know-nothing analysts earning their salaries for getting calls 100% wrong can take solace in the fact that the gov't doesn't really have a clue what it's doing, either. In a classic "left leg doesn't know what the right leg is doing", finance minister Luis Carranza's view on capital controls;
"...in a world with capital mobility and development of financial systems, it is not prudent to place any type of control on (short term) capital flows...”
is turning out to be somewhat different to that of the men-in-suits at Peru's central bank
April 11 (Bloomberg)
".....It's important that we gradually limit capital inflows,'' central bank General Manager Renzo Rossini said in a conference call from Lima today....."