Peru's central bank raised its monetary policy interest rate by a further 25 basis points to 3.75 percent to curb inflationary expectations that exceed its target range and said it was ready to raise rates further if necessary to bring inflation back to its target range.
The Central Reserve Bank of Peru (BCRP) has now raised its rate by 50 basis points this year following a first rate hike in September. Although it maintained the rate in both October and November, it always underscored that it was ready to raise rates again.
In addition, the bank's chief economist Adrian Armas told reporters last month that the BRCP might raise its rate if inflation rises more than expected and that the renewed decline in the sol's exchange rate would impact inflation.
Inflation jumped to 4.17 percent in November from 3.66 percent in October, well above the central bank's target range of 1-3 percent around a midpoint of 2.0 percent.
Inflation has been fanned by depreciation of the sol currency with its exchange rate against the U.S. dollar reaching lows not seen since 2006 despite intervention by the central bank.
The sol started falling in early 2013 but has stabilized in the last two weeks after hitting 3.38 to the dollar in late November compared with an exchange rate of 2.5 to the dollar in January 2013.
Today the sol was trading at 3.38 to the dollar, down 11.5 percent this year and down 26 percent since the start of 2013.
In today's statement, the central bank said recent data showed that economic activity was below potential but at a higher growth rate in the fourth quarter and by 2016 the economy should be growing at a rate that is similar to the country's potential.
Peru's potential growth rate is estimated at 4.5 percent but the country has been hit hard by the sharp drop in the price of copper, one of its main exports, a shift that has been reflected in the decline in the sol's exchange rate.
The Central Reserve Bank of Peru issued the following statement:
1. The Board of the Central Reserve Bank of Peru approved to raise the monetary policy
interest rate by 25 bps to 3.75 percent. This level of the policy rate is compatible with an
inflation that foresees that inflation will converge to the target range in 2016, but takes into
account the following factors:
i) Inflation expectations are above the inflation target range.
ii) Inflation has been affected by temporary supply factors such as the rise in the prices of
some food products and utilities as well as by the depreciation of the nuevo sol against
the dollar, the effect of these factors not being foreseen to extend in a general manner to
the rest of prices.
iii) Economic activity has been recovering gradually.
iv) International indicators show mixed signals of global economic recovery, as well as
volatility in external financial markets and foreign exchange markets.
2. The Board oversees the inflation forecasts and inflation determinants and stands ready to
make adjustments in its monetary policy rate to lead inflation to the target range in the policy
horizon, should it be necessary.
3. Inflation in November recorded a rate of 0.34 percent, as a result of which the interannual
rate of inflation rose from 3.66 in October to 4.17 percent in November. The monthly rate of
inflation is explained by the increase observed in the prices of perishable food products.
Inflation without food and energy showed a rate of 0.12 percent, as a result of which the
interannual rate of inflation registered 3.46 percent in November, a similar rate to that
observed in the previous month.
4. Recent indicators of economic activity and business and consumer expectations show an
economic cycle with lower GDP growth rates than the potential output levels, but with a
faster pace of growth in the fourth quarter of the year. It is estimated that the economy will be
growing at rates similar to those of the potential output in 2016.
5. The Board of the Central Bank also approved to raise the annual interest rates on lending
and deposit operations in domestic currency (not included in auctions) between the BCRP
and the financial system, as specified below:
a. Overnight deposits: 2.50 percent.
b. Direct repos and rediscount operations: i) 4.30 percent for the first 15 operations
carried out by a financial institution in the last 12 months, and ii) the interest rate set
by the Committee of Monetary and Foreign Exchange Operations for additional
operations to the 15 first operations carried out in the last 12 months.
c. Swaps: a commission equivalent to a minimum annual effective cost of 4.30 percent.
6. The Monetary Program for the following twelve months will be approved on the Board
meetings to be held according to the following schedule:
January 14 February 11 March 10
April 14 May 12 June 9
July 14 August 11 September 8
October 13 November 10 December 15
7. In 2016 the BCRP will publish its Inflation Reports on the following dates:
March 18 June 17 September 16 December 16