Peru: Central Bank holds fire on subdued inflation and improving, but still subdued, growth in June
June 8, 2018
At its 7 June monetary policy meeting, the Central Bank of Peru (BCRP) decided to keep the policy interest rate unchanged at 2.75%. It last cut the rate by 0.25% in March. The Bank’s decision was motivated by subdued inflation and well-anchored inflation expectations, along with improving, but still below-potential, economic growth.
Inflation increased somewhat in both April and May after hitting an over seven-year low in March. However, in the last three months it remained below the lower bound of the Central Bank’s target range of 1.0%–3.0%. A reversal of supply shocks and below-potential economic growth were again behind the subdued readings. Meanwhile, inflation not counting food and energy remained moderate, as did inflation expectations for the next 12 months.
That said, economic activity expanded at a considerably stronger rate in the first quarter, and recent data suggests momentum carried over into the second quarter. GDP growth jumped from 2.2% in Q4 to 3.2% in Q1, on the back of a faster expansion in business investment in the mining sector, solid infrastructure expenditure and a rebound in exports. Indicators for Q2 suggest that the economy gained further steam. That said, the Bank considers the current pace of growth to be below-potential, thus not leading to unmanageable inflationary pressures. The Bank therefore expects inflation to remain close to the lower bound of its target range in the next few months, then converge to its 2.0% target by the end of the year.
The Bank’s statement clearly indicated that the BCRP will maintain its current expansionary monetary stance until inflation remains below 2.0%, expectations are well-anchored within the Bank’s target range and the pace of growth in economic activity approaches its potential. The next monetary policy meeting will be held on 12 July.
Peru Interest Rate Forecast
FocusEconomics Consensus Forecast panelists see the monetary policy rate ending 2018 at 3.43%. For 2019, the panel projects a rate of 3.78% at the end of the year.