Peru: Central Bank holds interest rate at 3.50% in October after surprise hike in September
October 15, 2015
The Central Bank decided to keep the reference rate at 3.50% at its 15 October monetary policy session, meeting market expectations. The Bank hiked the rate from 3.25% to its current level in a surprise move at its previous meeting in September as concerns over rising inflation pressures and currency depreciation outweighed concerns regarding the weak economy. The September hike allowed the Peruvian Central Bank preemptively to offset the negative impact of an eventual hike by the U.S. Federal Reserve, although there is ongoing uncertainty about when the Fed will make a move.
According to the Central Bank, inflation pressures remain due to higher prices for certain foods and public services as well the weak currency. While inflation moderated slightly from 4.0% in August to 3.9% in September, this exceeds the upper limit of the bank’s target range of 1.0%–3.0%. However, the Bank stated that inflation expectations converge toward the target and monetary authorities are confident that the current interest rate will help bring inflation down further.
The Central Bank explained that the Peruvian economy continues to perform below potential, but that the pace of growth has picked up in the second half of the year. In addition, the Central Bank projects a gradual recovery in the domestic economy and a narrowing of the negative output gap in the next year. 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.
The Bank noted after its rate hike in September that this did not mark the beginning of a tightening cycle, but emphasized once again in October that further adjustments will be considered if inflation strays from the long-term target range. The next monetary policy meeting is scheduled for 12 November.
Author: Carl Kelly, Economist