Peru: Central Bank raises rates for second successive meeting in September
September 9, 2021
At its 9 September meeting, the Central Bank of Peru raised its key policy interest rate by 50 basis points to 1.00%. This came on the heels of August’s 25 basis-point hike, which had ended a run of 15 meetings with the rate being held at a record low of 0.25%. As such, September’s move marked only the second hike in borrowing costs in over five years, and was more or less in line with market analysts’ expectations.
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 and an over twelve-year high of 5.0% in August—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 price pressures higher in the short term, giving the Bank enough cause to raise rates once again.
Looking ahead, the Bank tempered its decision with a dovish tone, commenting that it did not “necessarily imply a cycle of successive increases in the reference rate”, with the real policy rate remaining at historic lows despite the 50 basis-point jump. However, its forward guidance did note with caution that changes to inflation expectations would lead it “to consider, if necessary, changes in the monetary policy position”.
Alberto Ramos, economist at Goldman Sachs, sees further rate hikes becoming increasingly likely, commenting:
“In our assessment, despite the data-dependent forward guidance additional near-term rate hikes are likely given the deterioration of the current and prospective inflation and exchange rate outlook. The still very low policy rate level (highly negative real policy rate), the recent large inflation surprises, deteriorating short- and medium-term inflation and PEN expectations, heightened political and policy uncertainty (pressuring the capital account; capital flight), and broad risk management considerations justify a faster and more frontloaded monetary policy normalization path to at least a neutral policy stance.”
The next monetary policy meeting is scheduled for 7 October.
Author: Stephen Vogado, Economist