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Peru Monetary Policy October 2021

Peru: Central Bank raises rates for third successive meeting in October

At its 7 October meeting, the Central Bank of Peru raised its key policy interest rate by 50 basis points to 1.50%. The decision was more or less in line with market analysts’ expectations, and took the cumulative total of hikes since August to 125 basis points.

The raise reflected continued concerns regarding the sharp spike in inflation in recent months—the annual rate hit an over twelve-year high of 5.2% in September—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, repeating that it did not “necessarily imply a cycle of successive increases in the reference rate”. Adding a further statement since last month, it also noted that it “considers it appropriate to maintain an expansionary monetary policy stance for a prolonged period of time”. Nevertheless, the majority of our panelists see the Bank raising rates again before the end of 2021.

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 recurrent 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 frontloaded monetary policy normalization path to at least a neutral policy stance.”

The next monetary policy meeting is scheduled for 11 November.

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