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Peru Monetary Policy July 2021

Peru: Central Bank holds rates at July meeting; moderates dovish tone further

At its 8 July meeting, the Central Bank of Peru held its key policy interest rate at 0.25%, as widely expected by market analysts. The decision marked the 15th consecutive hold since a combined 200 basis points of rate cuts across March–April 2020 took the rate to its current record low.

The hold reflected a continued wait-and-see approach, supported by contained inflation expectations and a desire to bolster the ongoing recovery in activity. The Bank sees inflation falling back within the 1.0%–3.0% target range throughout 2021–2022—having risen to 3.3% in June—and continues to project it to place toward the lower end of that range during 2022. Meanwhile, the Bank noted a deterioration in incoming economic data in June after May’s upturn, although expectations of a pronounced vaccine-driven global economic recovery in the coming months remain unchanged.

Looking ahead, the Bank amended its forward guidance slightly for the second meeting running this month, dropping the mention that it will maintain a “strong” expansionary policy and instead adopting a slightly less dovish tone by stating it will “maintain an expansionary stance as long as the negative effects of the pandemic on inflation and its determinants persist”. Nonetheless, the majority of our panel see rates staying at 0.25% until the end of the year, although a growing minority see a rate hike of between 25–50 basis points before the end of 2021.

Regarding the shift in tone, Alberto Ramos, economist at Goldman Sachs, sees a rate hike becoming increasingly likely, commenting:

“The MPC […] is now signaling the intention to preserve just an accommodative stance while the impact of the pandemic on inflation and its drivers persist. As such, a rate hike as soon as the 12 August meeting is in play. In fact, we argue that given that the policy rate is currently at an historical low of 0.25% and the ex-ante real policy rate has continued to decline, a 25bp rate hike at the next meeting would in fact still maintain a highly accommodative/expansionary monetary stance. Beyond inflation, political and policy uncertainty and risk management considerations could also lead the Central Bank to go for earlier liftoff and possibly also more-frontloaded monetary policy normalization.”

The next monetary policy meeting is scheduled for 12 August.

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