LIMA: Peru's sol strengthened slightly on W ednesday, even as the central bank sought to curb appreciation of the currency by raising deposit requirements on banks.
The sol bid 0.11 percent stronger at 2.635 per dollar, heading toward its strongest close in 15 years.
The central bank moved to tighten liquidity on Monday in a bid to discourage inflows of speculative capital. Economists said the central bank's decision to raise deposit requirements meant a rate hike is now unlikely, even after inflation came in at a higher-than-expected 0.53 percent on Tuesday, a market holiday.
"This is a way of avoiding having to increase the policy rate," said Benito Berber, a strategist at Nomura Securities. "It's a way to avoid further strengthening rather than weakening the currency."
The tighter measures will increase the average deposit rate on bank accounts denominated in soles and US dollars by 0.5 percentage point and boost the marginal deposit rate to 30 percent from 25 percent on accounts denominated in soles.
The central bank's measures also extended to three years from two years the 60 percent deposit requirement that targets short-term credits from abroad. A deposit requirement of 20 percent will also apply to some credits and bonds with terms longer than three years.
In the past, the central bank has said higher deposit requirements are typically equivalent to a 50-basis-points hike in the base rate, which has been at 4.25 percent for 11 months.
The central bank expects 12-month inflation, which was 4.08 percent as of Tuesday, to fall back into its 1 to 3 percent target range by the end of the year after supply shocks wane.
Economic growth has been stronger than expected and is forecast to reach 6 percent this year. That has lifted demand for credit, while the sol has firmed about 2 percent since Jan. 1 on heavy inflows of dollars that the central bank has absorbed with frequent interventions on the spot market.
So far this year the central bank has bought $7.8 billion, lifting reserves to a record of around $56 billion.
Abrupt fluctuations in the sol, which has gained 2 percent so far this year, have long concerned central bank officials as about half of Peru's bank deposits are held in dollars and many people and companies earn money in one currency but owe debts in the other.
Central Bank President Julio Velarde said on Friday the bank was most concerned about a potential swift depreciation of the sol instead of the ongoing slow appreciation.
He has apparently ruled out taking measures more drastic than frequent interventions or tighter deposit rules.
"We are not considering capital controls of any type," Velarde said in a conference call on Friday.
In 2008, Peruvian officials rejected critics who said the central bank was flirting with capital controls when it raised deposit rules and introduced a commission on a type of money market instrument to curb inflows.
Those criticisms resurfaced on Monday from the 4Cast consultancy, but other economists said the more defensive posture to limit the sol's gains was no cause for concern, even as many developing countries worry about excessive gains in their currencies.
"Lending is strong and there's the need to tighten monetary conditions," said Berber. "But at the same time they don't want to lose competitiveness so they want to avoid increases in policy rate that could bring even more inflows."
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