Peru: Central Bank holds its ground in March despite heightened coronavirus-related risks
At its monetary policy meeting on 12 March, the Central Bank of Peru (BCRP) held the policy interest rate steady at 2.25%, the lowest point since July 2010, although it singled out the spread of coronavirus (Covid-19) as the main risk to global economic activity. The Bank last cut the key rate by 25 basis points in November, the second of the two cuts delivered last year.
Within-target inflation, a further decline in inflation expectations and firming albeit still-modest economic activity led the Bank to stand pat. Inflation was stable at January’s 1.9% in February, thus remaining below the midpoint of the Central Bank’s target range of 1.0%–3.0%. Meanwhile, economic activity seemingly gained steam in January-February on the back of soaring public capital spending, following a notable slowdown in Q4; however, faltering business confidence and spillovers from Covid-19 suggest the economy is poised to gain only limited traction in the first quarter of this year.
The Bank did not provide any strong forward guidance in the accompanying press release. That said, monetary policy will likely remain expansionary and further rate cuts cannot be ruled out going forward. Inflation is projected to remain close to the midpoint of the target band and risks stemming from weaker-than-expected domestic and external demand are tilted to the downside, further easing could be required. In the event economic activity is significantly hit by the current global health emergency, output gap will not be reduced at the pace expected by the Bank and inflation could deliver downside surprises, prompting the BCRP to take action.
The next monetary policy meeting will be held on 16 April.