Peru raises policy rate to 3½% as inflation expectations increase

By Marisa Wong

Morgantown, W.Va., Sept. 11 – The board of the Central Bank of Peru decided to raise the monetary policy interest rate by 25 basis points to 3½%. The rate had been lowered to 3¼% in January 2015.

According to a bank notice, the board also approved increases to the annual interest rates on lending and deposit operations in domestic currency between the bank and the financial system. The rate for overnight deposits is now 2¼%, direct repos and rediscount operations are 4.05%, and for swaps the commission is equivalent to a minimum annual effective cost of 4.05%.

The board said that the new policy rate is consistent with the forecast that inflation will converge to the target range in the 2015 to 2016 horizon.

The decision to raise the rate takes into account that inflation expectations have increased, reaching levels similar to the upper rate of the inflation target range; inflation has been affected by temporary events, such as the rise of the prices of some food products and the depreciation of the nuevo sol against the dollar; international indicators show mixed signals of global economic recovery, as well as high volatility in external financial markets and foreign exchange markets; and economic activity has been recovering gradually.

The new rate is compatible with a real interest rate of ½% and reflects an expansionary monetary policy stance, the board said.

The board noted that the bank has not started a sequence of hikes in its policy interest rate.

According to the notice, inflation in August showed a rate of 0.38%. As a result, the interannual rate of inflation rose to 4.04% in August from 3.56% in July. The monthly rate of inflation is explained by the increase observed in the prices of perishable food products and electricity rates.

Inflation without food and energy showed a rate of 0.09%. Consequently, the interannual rate of inflation rose to 3.48% in August from 3.36% in July, which reflects the effect of the changes recorded in the exchange rate.

Inflation is expected to show a rate of 3.4% at the end of 2015 and a rate of 3% at the end of 2016.

Recent indicators of economic activity and business and consumer expectations continue showing an economic cycle with lower GDP growth rates than the potential output levels but with a faster pace of growth in the second half of the year. The bank estimates that the economy would be growing at rates similar to those of the potential output in 2016.

The monetary program for the next month will be approved at a board meeting to be held on Oct. 15.

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