Peru: Central Bank cuts policy interest rate for the second time this year in March
At its 8 March monetary policy meeting, the Central Bank of Peru (BCRP) decided to cut the policy interest rate from 3.00% to 2.75%, following a cut of the same magnitude at its January meeting. The Bank’s decision was motivated by declining inflation and inflation expectations, below-potential economic growth and weakening business confidence.
Inflation dropped further from 1.3% in January to 1.2% in February, coming in below the mid-point of the Central Bank’s target range of 1.0% to 3.0% for the fourth consecutive month. A reversal of the supply shocks due to the Coastal El Niño recorded last year was again behind the slowdown. Inflation not counting foodstuff and energy remained stable at a low level, while headline inflation expectations for the next 12 months fell.
Moreover, economic activity expanded below potential in Q4: GDP growth decelerated, dragged down by the external sector; fixed investment also expanded at a more moderate pace than in the previous quarter. Additionally, business sentiment weakened significantly in February, although it remained in optimistic territory. In the same month, consumer sentiment plunged, remaining deeply entrenched in pessimistic territory. Consequently, the Bank expects inflation to moderate further early this year and converge to its 2.0% target afterwards.
The Bank’s statement was devoid of strong forward guidance. The BCRP expressed, however, its readiness to modify its monetary policy stance if new information on inflation were to make it necessary. The next monetary policy meeting will be held on 12 April.