Peru: Central Bank maintains policy rate at record low in June
June 11, 2020
On 11 June, the Central Bank of Peru (BCRP) decided to keep the policy interest rate unchanged at 0.25% for the second meeting in a row, as widely expected by market analysts. This comes after cutting the rate by a combined 200 basis points over March–April, which pushed the key rate to its current record low level.
Developments due the ongoing pandemic have darkened Peru’s outlook significantly, reflected in the Bank’s dovish tone and its continued commitment to maintain a “strong expansionary monetary stance”. Falling inflation expectations, severely hampered domestic economic activity and heightened external sector risks amid volatile foreign demand for Peruvian products all supported the Bank’s decision. The decision came after a mild uptick in inflation in May, reflecting the Bank’s inclination towards a continued pause in cutting rates.
In its communiqué, the Bank highlighted the liquidity injections undertaken in lieu of further rate cuts, totaling PEN 44 billion as of 10 June and including various repurchase agreements. This included PEN 21 billion—of a total PEN 30 billion—of funds placed into the private sector through the Reactive Peru program, which has helped bring down interest rates over the past few months.
Looking ahead, the BCRP kept its forward guidance unchanged this month, leaving open the possibility of further easing and stating it “stands ready to extend monetary stimulus in different ways”. Moreover, inflation is expected to fall due to depressed demand, keeping space open for accommodative action.
Commenting 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 the remainder of 2020, and to start normalizing monetary policy only when there are clear signs of sustainable recovery in economic activity.”
This is a viewpoint shared by FocusEconomics LatinFocus panelists, the vast majority of whom see no further rate cuts before the end of the year.
The next monetary policy meeting is scheduled for 9 July.
Author: Stephen Vogado, Economist