Peru: Central Bank maintains policy rate at record low in July
July 9, 2020
On 9 July, the Central Bank of Peru (BCRP) maintained its key policy interest rate at the record low of 0.25% for the third meeting in a row, as widely expected by market analysts. The decision followed a combined 200-basis-points of rate cuts over March–April.
The hold came amid a bleak outlook for the economy, with available data pointing to severely hampered economic activity in the second quarter following the strict lockdown enacted in March. This was reflected in the Bank’s dovish tone and its continued commitment to maintain a strong expansionary monetary stance for a prolonged period. Furthermore, falling inflation throughout much of the first half of the year and the expectation of a global economic slowdown this year supported the Bank’s decision to keep rates low.
In its communiqué, the Bank highlighted the liquidity injections—totaling PEN 48 billion as of 8 July—undertaken to support the financial system. This included PEN 26 billion—of a total PEN 30 billion—of funds placed into the private sector through the Reactive Peru program, which has recently entered its second phase with a focus on providing funds to small- and micro-business. All told, the liquidity provisions have helped bring down interest rates over the past few months and produced a 14% increase in credit growth in the private sector in May.
Looking ahead, the BCRP kept its forward guidance unchanged again this month, leaving open the possibility of further easing and stating it “stands ready to extend monetary stimulus in different ways”. Furthermore, inflation is projected to decline due to falling internal demand, keeping space open for accommodative action.
Commenting on the Bank’s decision, Paulo Mateus, an economist at Goldman Sachs, noted:
“We believe the rate has reached its effective lower bound [and] expect the MPC to keep the rate at 0.25% through late 2021, and to start normalizing monetary policy only when the level of activity returns to pre-pandemic levels.”
This is a viewpoint unanimously shared by FocusEconomics LatinFocus panelists, all of whom see no further rate cuts before the end of the year.
The next monetary policy meeting is scheduled for 13 August.
Author: Stephen Vogado, Economist