Peru: Central Bank holds policy interest rate at 3.75% in August
August 10, 2017
At its 10 August monetary policy meeting, the Central Bank decided to keep the policy interest rate on hold at 3.75%, as widely expected, because of the ongoing recovery in economic activity and inflation remaining within the Bank’s target range of 1.0%–3.0%. The decision to stay put follows a cut in the interest rate in July of 25 basis points.
Although inflation rose in July, inflation expectations for the next 12 months dropped further within the target range, signaling space for the Central Bank to ease monetary policy in the short-term. The economy picked up pace in Q2 on the back of private consumption growth and a milder contraction in fixed investment, expanding 2.4% year-on-year, up from Q1’s 2.1% expansion. Moreover, business expectations remain upbeat, and the economy is projected to make further gains in subsequent quarters on the back of greater public and private investment.
However, the pace of growth in domestic economic activity continues to fall short of its potential level, which could offer further encouragement to the Bank to ease monetary policy at subsequent meetings. Clouding the optimistic outlook are uncertainties pertaining to the timing of the European Central Bank’s reversal of monetary stimulus, together with the evolution of the U.S. Federal Reserve’s tightening cycle.
Looking forward, the Bank noted that it would closely monitor the determinant factors of inflation—in particular, incoming data on inflation expectations and developments in economic activity—to guide its monetary policy stance. The next monetary policy meeting will be held on 14 September, when the Board of the Central Bank will approve the Monetary Program for September.
Author: Nihad Ahmed, Economist