Money in Peru

Peru - Money

Central Bank raises rates for sixth straight meeting in January

At its 6 January meeting, the Central Bank of Peru raised its key policy interest rate by 50 basis points to 3.00%, matching the move it made at its December meeting. The decision was in line with market analysts’ expectations, and took the cumulative total of hikes since August 2021 to 275 basis points.

The raise reflected continued concern around spiraling inflation in recent months—the annual rate ended 2021 at a near 13-year high of 6.4%—driven largely by a weaker sol and higher food and energy prices. While inflation is expected to fall back within the 1.0%–3.0% target range by the end of this year, 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 adopted a much less dovish tone than in previous communiqués, no longer commenting that this latest move did not “necessarily imply a cycle of successive increases in the reference rate”, nor that it would maintain “an expansionary monetary policy stance for an extended period”. Instead, the Bank amended its language to state that it “sees the convenience of continuing the normalization of monetary policy in the next months”. As such, a number of panelists see rates being raised further in the first quarter of the year.

Commenting on the outlook, Sergio Armella, economist at Goldman Sachs, stated:

“In our assessment, the low ex-ante real policy rate level (still negative), the recurrent inflation surprises, deteriorating short- and medium-term inflation and PEN expectations, heightened political and policy uncertainty, and broad risk management considerations warrant additional rate hikes and a frontloaded monetary policy normalization path to at least a neutral policy stance.”

The next monetary policy meeting is scheduled for 10 February.

The FocusEconomics panel sees the monetary policy rate ending 2022 at 3.58% and 2023 at 3.84%.