Peru: Policy rate held at record low in September
September 10, 2020
On 10 September, the Central Bank of Peru (BCRP) maintained its key policy interest rate at the record low of 0.25% for the fifth meeting in a row, as widely expected by market analysts. The decision followed a combined 200-basis-points of rate cuts over March–April.
The hold reflected a wait-and-see approach, with recent national accounts data detailing the heavy impact that the pandemic has had on the economy. However, the Bank commented that data for July and August indicates the beginning of a recovery in activity, in line with a staged reopening of the economy throughout the period. Moreover, muted inflationary pressures, with inflation sitting below the midpoint of the Bank’s 1.0–3.0% target range for much of the year, supported its decision to keep rates low.
In its communiqué, the Bank highlighted the liquidity injections—totaling PEN 61 billion as of 9 September—provided to support the financial system. All told, the liquidity measures have helped to bring down interest rates over the past few months and produced a 14% year-on-year increase in credit growth in the private sector in July.
Looking ahead, the BCRP kept its forward guidance unchanged again this month, leaving open the possibility of further easing and stating that it “stands ready to extend monetary stimulus in different ways”. Furthermore, inflation is projected to decline due to falling internal demand, keeping space open for accommodative action.
Commenting on the Bank’s decision, Paulo Mateus, an economist at Goldman Sachs, noted:
“Given the clear guidance of stable policy rate for an extended period, we believe the rate has reached its effective lower bound. We expect the MPC to keep the rate at 0.25% through at least late 2021, and to start normalizing monetary policy only when the level of activity is on a sustainable recovery path approaching pre-pandemic levels.”
This is a viewpoint largely shared by FocusEconomics LatinFocus panelists, the vast majority of whom see no further rate cuts before the end of the year.
The next monetary policy meeting is scheduled for 7 October.
Author: Stephen Vogado, Economist