Peru: Central Bank keeps policy rate unchanged at its April meeting
At its 12 April monetary policy meeting, the Central Bank of Peru (BCRP) decided to keep the policy interest rate unchanged at 2.75%, following a 0.25% cut in March. The Bank’s decision was motivated by declining inflation and inflation expectations, and below-potential economic growth.
Inflation dropped for the fifth consecutive month in March, plunging from 1.2% in February to 0.4%, an over eight-year low. As a result inflation moved below the lower bound of the Central Bank’s target range of 1.0% to 3.0%. A reversal of supply shocks and below-potential economic growth were behind the slowdown. Inflation not counting food and energy also moderated, as did inflation expectations for the next 12 months.
Moreover, economic activity continued to expand at a moderate pace in Q1, although the pace of growth was likely higher than in Q4 2017. Economic activity strengthened considerably in January from December, but both business and consumer confidence deteriorated throughout the quarter, partly a by-product of political instability. Moreover, unemployment rose notably in the first two months of the year, which does not bode well for already anemic consumer spending. On the other hand, public investment expanded strongly in January and February, although it decelerated considerably in March due to the unfolding of the latest political crisis, which prompted former President Kuczysnki to resign and Martín Vizcarra to take over as new president. For these reasons, the Bank expects inflation to remain close to the lower bound of its target range in the first months of 2018, then converge to its 2.0% target by the end of the year.
The Bank’s statement was again devoid of strong forward guidance. The BCRP expressed, however, its readiness to modify its monetary policy stance if new information on inflation were to make it necessary. The next monetary policy meeting will be held on 10 May.