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Peru Monetary Policy February 2021

Peru: Central Bank keeps rates at record low in February

At its 11 February meeting, the Central Bank of Peru kept its key policy interest rate at the record low of 0.25% for the tenth consecutive meeting. 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, supported by muted inflation expectations and a desire to boost 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 at the end of 2021 due to a negative output gap during the year. Moreover, the Bank noted a moderation in incoming economic data in January due to elevated daily Covid-19 infections and new restrictive measures enacted by the government.

In its communiqué, the Bank highlighted the liquidity injections—totaling close to PEN 65 billion on 10 February—provided to support the financial system. These measures have helped to bring down interest rates over recent months and produced a 12.3% year-on-year increase in credit growth in the private sector in 2020.

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, Diego W. Pereira and Lucila Barbeito, economists at JPMorgan, see rates remaining unchanged this year, commenting:

“In terms of monetary path ahead, we expect the BCRP to remain on hold, with the policy rate at the technical minimum until 1Q22. In our base case scenario we expect the monetary authority to start a gradual correction of the policy rate by February 2022 with 25bp, so as to secure a very gradual removal of the monetary impulse throughout 2022-23.”

This is a viewpoint shared by the majority of FocusEconomics LatinFocus panelists, who see no further rate cuts before the end of the year. However, a notable minority project rates to rise gradually from Q2 2021 onwards.

The next monetary policy meeting is scheduled for 11 March.

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