Peru: Central Bank surprisingly hikes reference interest for first time in over four years
September 10, 2015
The Central Bank decided to increase the reference rate from 3.25% to 3.50% at its 10 September monetary policy meeting, contrasting the expectations of market analysts’ who projected the rate to remain at 3.25%, where it had been resting for the previous eight months. The Bank lifted the rate in September in an attempt reign in rising inflation and inflation expectations, while the domestic economy still performs below potential. Peru’s rate hike comes amid ongoing uncertainty about a potential interest rate increase by the U.S. Federal Reserve next week.
According to the Central Bank, inflation expectations rose close to the upper limit of the bank’s target range of 1.0%–3.0% and inflation in September came in at 4.0%, thus exceeding the target range. A weak Peruvian sol and higher food prices fueled inflation. In the Bank’s view, the new level of the interest rate is adequate to ensure bringing inflation to within the target range during the next year.
The Central Bank sees that the Peruvian economy continued to perform below potential, but that the pace of growth picked up slightly in the second quarter of this year. In addition, the Central Bank projects a gradual recovery in the domestic economy and a narrowing of the negative output gap in the next year. As for international developments, the Bank noted that there were mixed signals regarding the recovery of the global economy and that foreign exchange and financial markets currently were characterized by volatility.
While noting that September’s rate hike did not mark the beginning of a tightening cycle, the Bank left the door open for further increases in the interest rate saying that the Central Bank stands ready to adjust the rate further in order to bring inflation back into the target range. The next monetary policy meeting is scheduled for 15 October.
Author: Carl Kelly, Economist