Peru: Central Bank surprisingly cuts reference interest rate to 3.75% as economic weakness persists
June 11, 2014
The Central Bank decided to cut the reference rate from 4.00% to 3.75% at its 11 July monetary policy meeting. The move came as a surprise to the market, as the majority of analysts had expected no change. The reference rate had been at the previous level since November 2013. The decision to cut the rate comes amid continued weak economic growth and moderate inflation.
As in previous meetings, the Central Bank stated that the Peruvian economy is still performing below potential, although it still expects the sluggishness to be temporary. Newly released data and forward-looking surveys show a weakening in economic growth, mainly due to less dynamic investment and exports. Uneven recovery at a global level is putting a damper on the Peruvian export sector.
In terms of price developments, the Bank expects inflation to remain just above the upper band of its target range of 1.0%–3.0% in the coming months due to the delayed impact of recent supply shocks. Annual inflation decreased from 3.6% in May to 3.4% in June. Monetary authorities see inflation converging towards 2.0% in the medium- and long-term.
Despite the rate cut, the bank also emphasized that, "this decision does not imply the start of a series of reductions." The next monetary policy meeting will be held on 10 August.
Author: Carl Kelly, Economist