Peru: Central Bank hikes interest rate to 3.75% in December amid high inflation and expected Fed rate hike
December 10, 2015
The Central Bank decided to hike the reference rate from 3.50% to 3.75% at its 10 December monetary policy session, meeting market expectations. The Bank’s hike is the second in the past four months and is designed to counter inflation fueled in part by currency depreciation. The hike is also seen as a preemptive move ahead of the expected U.S. Federal Reserve rate hike, which will likely trigger capital outflows and put further pressure on the sol.
According to the Central Bank, inflation pressures have increased again due to higher prices for food and ongoing currency weakness. Inflation jumped from 3.7% in October to 4.2% in November, which far exceeds the upper limit of the Bank’s target range of 1.0%–3.0%. The Bank also explained that inflation expectations are above the target range, although monetary authorities are confident that the interest rate hike will help reduce inflation heading into 2016.
The Central Bank explained that the Peruvian economy continues to perform below potential, but that that a gradual recovery is underway and GDP growth should accelerate in the final quarter of the year. The Bank expects further improvements going forward and foresees the economy performing close to its potential in 2016. As for international developments, the Bank noted that there were mixed signals regarding the recovery of the global economy and that there is still volatility in foreign exchange and financial markets.
Unlike other meetings, the Bank did not mention whether it was specifically considering further adjustments if inflation strays from its long-term target range. The first monetary policy meeting of next year is scheduled for 14 January.
Author: Carl Kelly, Economist