Peru: Central Bank raises rates for first time in over five years at August meeting
At its 12 August meeting, the Central Bank of Peru raised its key policy interest rate to 0.50%, ending a run of 15 consecutive meetings with the rate being held at a record low of 0.25%. The move marked the first hike in borrowing costs in over five years, and surprised market analysts, the majority of whom had seen rates being held for a 16th consecutive meeting.
The raise reflected increasing concerns regarding the sharp spike in inflation in recent months—the annual rate hit an over four-year high of 3.8% in July—driven largely by a tumbling sol amid significant political turmoil since Pedro Castillo’s presidential election victory. While inflation is expected to fall back within the 1.0%–3.0% target range in the coming 12 months, heightened political uncertainty and its effect on exchange rates could push inflation higher in the short term, giving the Bank enough cause to raise rates.
Looking ahead, the Bank commented that it had “decided to continue with an expansionary monetary policy”, with the real policy rate remaining at historic lows despite the 25 basis-point jump. However, it did moderate its forward guidance to be slightly less dovish, stating more directly that changes to inflation expectations would lead it “to consider, if necessary, changes in the monetary policy position”.
Alberto Ramos, economist at Goldman Sachs, is one of those that sees further rate hikes becoming increasingly likely, commenting:
“In our assessment, despite the data-dependent forward guidance additional near-term rate hikes are likely and would be in keeping with removing part of the current very high level of accommodation while still preserving a stimulative stance. Given that the policy rate is currently at a very low 0.50% and the ex-ante real policy rate has continued to decline, additional rate hikes would still maintain a highly accommodative/expansionary monetary stance. Beyond inflation, political and policy uncertainty and risk management considerations could also lead the Central Bank to go for a steady and more-frontloaded monetary policy normalization.”
The next monetary policy meeting is scheduled for 9 September.