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Peru Monetary Policy March 2021

Peru: Central Bank holds rates for 11th month running in March

At its 11 March meeting, the Central Bank of Peru kept its key policy interest rate at the record low of 0.25%, marking the 11th consecutive hold. The decision followed a combined 200 basis points of rate cuts across March–April 2020 and was widely expected by market analysts.

The hold reflected a continued wait-and-see approach, sustained by muted inflation expectations and a desire to support the ongoing recovery in activity. The Central Bank sees inflation remaining within the 1.0–3.0% target range throughout 2021–2022, and still projects it to place toward the lower end of that range during 2022. Meanwhile, the Bank also noted an improvement in incoming economic data in February.

In its communiqué, the Bank highlighted the liquidity injections—totaling close to PEN 65 billion on 10 March—provided to support the financial system. These measures have helped to bring down interest rates over recent months and produced a 11.6% year-on-year increase in credit growth in the private sector in January 2021.

Looking ahead, the Bank kept its forward guidance unchanged again this month, leaving open the possibility of further easing and stating that it considered it “appropriate to maintain the highly expansive monetary policy stance for an extended period as long as the negative effects from the pandemic over inflation and its determinants persist”.

Regarding the outlook, Luis Ortega, economist at Credicorp Capital, sees rates remaining low for the foreseeable future, commenting:

“We believe that the Central Bank will hold its reference rate unchanged at 0.25% at least until mid-2022 along with an abundant liquidity environment. The very severe hit to the economic activity from the pandemic will imply that the GDP will remain below its potential even during 2022, and so inflation is expected to remain within the target range during the forecast horizon. If the negative output gap narrows at the expected pace, the monetary policy rate could return to its pre-pandemic level of 2.25% only around mid-2024 (or even later).”

The next monetary policy meeting is scheduled for 8 April.

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