Peru: Central Bank leaves policy rate unchanged in October
October 7, 2020
On 7 October, the Central Bank of Peru held its key policy interest rate at the record low of 0.25% for the sixth meeting in a row. The decision followed a combined 200 basis points of rate cuts across March–April and was largely expected by market analysts.
The hold reflected a wait-and-see approach, with Q2 national accounts data detailing the heavy impact that the pandemic inflicted on the economy. However, the Bank noted that incoming data points to a recovery in the third quarter, as the economy has gradually reopened following the strict lockdown imposed at the end of Q1. Moreover, subdued inflationary pressures, with inflation sitting below the midpoint of the Bank’s 1.0%–3.0% target range for much of the year, supported its decision to keep rates low.
In its communiqué, the Bank highlighted the liquidity injections—totaling PEN 61 billion on 6 October—provided to support the financial system. As a result, the liquidity measures have helped to bring down interest rates over recent months and produced a 14.4% year-on-year increase in credit growth in the private sector in August.
Looking ahead, the Bank kept its forward guidance unchanged again this month, leaving open the possibility of further easing and stating that it “stands ready to extend monetary stimulus in different ways”. Furthermore, inflation expectations remain low due to falling internal demand, keeping space open for accommodative action.
Reflecting on the Bank’s decision, Paulo Mateus, an economist at Goldman Sachs, noted:
“Given the clear guidance of stable policy rate for an extended period, we believe the rate has reached its effective lower bound. We expect the MPC to keep the rate at 0.25% through at least late 2021, and to start normalizing monetary policy only when the level of activity is on a sustainable recovery path approaching pre-pandemic levels.”
This is a viewpoint shared by José Luis Nolazco, an economist at Credicorp Captial, who commented:
“We believe that the Central Bank will keep its rate unchanged at 0.25% in 2021 and during much of 2022, as we foresee rate hikes only by 4Q22.”
Likewise, the vast majority of FocusEconomics LatinFocus panelists see no further rate cuts before the end of the year.
The next monetary policy meeting is scheduled for 12 November.
Author: Stephen Vogado, Economist