Peru: Central Bank keeps reference interest rate at 3.25% in June for fifth consecutive month
June 12, 2015
The Central Bank decided to maintain the reference rate at 3.25% at its 11 June monetary policy meeting, as market analysts had expected. The Bank cut the rate from 3.50% in January in an attempt to counter an ongoing loss of momentum in the economy as the mining export sector struggles with low global demand and prices. Despite ongoing weakness in the economy, rising inflation and concerns over a depreciating currency have deterred the bank from cutting its reference rate further,
As in previous meetings, the Central Bank stated that the Peruvian economy is still performing below potential. Recent data show an uneven economic recovery at the global level as well as volatility in international financial and foreign exchange markets. In terms of price developments, annual inflation increased from 3.0% in April to 3.4% in May amid higher utility and transport prices. Inflation is now above the upper limit of the bank’s target range of 1.0%–3.0%. However, monetary authorities still see inflation converging down toward 2.0% by 2016.
The Bank did reduce the average reserve requirement ratio for local currency deposits from 7.0% to 6.5%. The Bank has been slowly lowering the requirement during the past several months. The reductions have been implemented to support the expansion of credit in local currency with the aim of reducing the degree of dollarization in domestic financial markets and to boost economic activity amid declining mineral exports.
Despite the decision to hold the reference rate, the Bank signaled that it is prepared to take measures if inflation veers from the expected course. The next monetary policy meeting is scheduled for 9 July.
Author: Carl Kelly, Economist