Peru: Central Bank holds interest rate at 4.25% in December
December 15, 2016
In line with market expectations, the Central Bank decided to maintain the reference rate at 4.25% at its 15 December meeting, the last policy meeting of the year.
According to the Central Bank, inflation expectations have increased mildly in recent weeks but will remain within the target range of 1.0% to 3.0% in the next two years. Inflation in November was 3.3%, a notch lower than the 5-month high registered in October (3.4%). The Bank stated that it expects inflation to end 2017 between 2.0 and 2.5%%, slightly up from its September estimate of 2.0-2.2%. A drought in recent months has pushed up prices for certain foods and will likely delay convergence to the target range, but not by much.
The Central Bank commented that the global economy has improved and volatility in the global financial markets has reduced recently. In the domestic economy, activity in the manufacturing and construction sector has decelerated of late, due to subdued investment. However, business confidence has remained high. Therefore, the Bank expects private fixed investment to rebound in the coming two years and buttress economic growth. The Central Bank revised its GDP forecast for 2017 and now projects growth of 4.3%, down 0.2 percentage points from its September forecast.
Against this backdrop, Franco A. Uccelli Executive Director of Emerging Markets Sovereign Research at J.P. Morgan assesses the monetary policy outlook for 2017:
“We note that while a projected rebound in investment levels and higher economic growth next year should reduce the need for any additional monetary stimulus, persistent above-target inflation readings and further increases in inflation expectations could tilt the scale in favor of a tightening bias.”
The next monetary policy meeting is scheduled for 12 January.