Peru: Central Bank keeps policy rate unchanged at its May meeting
At its 10 May monetary policy meeting, the Central Bank of Peru (BCRP) decided to keep the policy interest rate unchanged at 2.75%. It last cut the policy interest rate, by 0.25%, in March. The Bank’s decision took into account subdued inflation and declining inflation expectations. It also factored in below-potential, but strengthening, economic growth.
Inflation inched up in April after five consecutive months of decline. It came in at 0.5%, marginally above March’s over eight-year low of 0.4%. As a result, inflation remained well below the lower bound of the Central Bank’s target range of 1.0%–3.0%. A reversal of supply shocks and below-potential economic growth were again behind the subdued inflation reading. Inflation not counting food and energy continued to moderate, as did inflation expectations for the next 12 months. The Bank expects inflation to move above the lower bound of its target range by the end of the second quarter of 2018, and then converge to its 2.0% target by the end of the year.
Economic activity accelerated notably in the first two months of the year on the back of rising overseas sales, expanding public investment, solid credit growth and domestic consumption. Growth had weakened significantly in Q4 2017 due to the rocky political environment. Moreover, unemployment, which rose notably in both January and February, dropped in March. Heading into Q2, the economy appears to be reaping the benefits of a more stable political environment following the resignation of President Kuczynski in late March. Both business and consumer confidence jumped in April, and in the same month public investment rebounded.
The Bank’s communiqué stated that it will maintain the current expansionary stance until both inflation and inflation expectations converge to the midpoint of the target range. The next monetary policy meeting will be held on 7 June.