Thursday, November 7, 2013

Peru cuts rate 25 bps to 4% in preventative move

    Peru's central bank cut its monetary policy reference rate by 25 basis points to 4.0 percent, its first change in rates since April 2011, describing the rate cut as "preventative and does not imply a sequence of reductions."
    But the Central Bank of Peru (BCRP) also said that if necessary the bank would "implement additional easing measures in the BCRP monetary policy instruments," a likely reference to the bank's reserve requirements that have been lowered several times since April to provide more credit to the financial system in the domestic sol currency.
    The central bank said the new rate was compatible with an inflation forecast of 2.0 percent in 2014-2015 and also reflects that economic growth is slowing to a rate that is below the country's potential level, that the world economy is slowing, a decline in inflation expectations and a reversal of supply factors that had a temporary impact on inflation.
    In addition to cutting the reference rate, BCRP also cut the overnight deposit rate to 3.2 percent, the rate on direct repo and rediscount operations to 4.8 percent while the commission on swaps was cut to an effective cost of 4.8 percent.

    Last month Peru's central bank described Peru's economic growth as close to its long-term sustainable rate while the external market had shown a slight recovery. Economists estimate Peru's sustainable growth rate around 6.0 to 6.5 percent.
    However, in late September the central bank's president, Julio Velarde, told a press conference that the bank had not ruled out eventually lowering its rate as it cut its 2013 growth estimate to 5.5 percent from a June forecast of 6.1 percent.
    In 2012 Peru's economy expanded by 6.3 percent but growth has slowed this year due to weaker mineral exports and lower domestic demand.
    In the second quarter, Peru's Gross Domestic Product grew by 1.1 percent from the first quarter for annual growth of 5.6 percent, up from 4.6 percent in the first. Last month Velarde said the economy would likely expand at an annual rate of between 6.2 and 6.3 percent in the fourth quarter.
   Peru's government has targeted growth of 5.7 percent this year.
    But the central bank said recent indicators had shown weaker economic activity, reflecting lower export growth due to slower growth among its trading partners and lower export prices.
    Peru's inflation rate rose slightly to 3.04 percent in October from 2.83 percent in September and is expected to remain within the central bank's upper band of its target range in coming months due to the lagging effect of supply shocks.
    But in 2014 inflation is expected to converge to the bank's 2.0 percent target. The central bank targets annual inflation of 2.0 percent within a range from 1.0-3.0 percent.


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