Peru: Central Bank surprisingly holds reference interest rate at 3.75% as economic weakness persists
August 7, 2014
The Central Bank decided to keep the reference rate at 3.75% at its 8 August monetary policy meeting. The reference rate was cut for the first time since November 2013 at the previous meeting in July in an attempt to counter sluggish economic growth. The majority of analysts had expected a further rate cut to 3.50% this month.
As in previous meetings, the Central Bank stated that the Peruvian economy is still performing below potential. Newly-released data and forward-looking surveys show continued weakness in the economy, mainly due to less dynamic investment and exports, although the Bank still expects the sluggishness to be temporary. Recent signs that the U.S. economy is recovering bodes well for the Peruvian exports 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 impact of supply shocks. Annual inflation decreased from 3.4% in June to 3.3% in July. Monetary authorities see inflation converging toward 2.0% in the medium- and long-term.
In a separate statement, the Bank also decided to reduce the average reserve requirement ratio for local currency deposits from 11.5% to 11.0%. The Bank has been slowly lowering the requirement since June of last year. The reductions are implemented to support the expansion of credit in local currency to reduce the degree of dollarization in domestic financial markets and to boost economic activity amid declining copper exports.
Author: Carl Kelly, Economist