Thursday, March 10, 2016

Peru pauses in rate tightening campaign after 4 hikes

    Peru's central bank left its monetary policy reference rate steady at 4.25 percent, living up to its guidance from last month that it would now pause in its tightening cycle, and confirmed that it expects inflation to gradually return to its target range.
    The Central Reserve Bank of Peru (BCRP) embarked on rate hikes in September 2015 as inflation started to accelerate and raised its reference rate four times by a total of 100 basis points.
    But signs that inflation is starting to decelerate were confirmed with a drop in the headline rate to 4.47 percent in February from 4.61 percent in January, though it remains well above the central bank's target of 2.0 percent, plus/minus 1 percentage point.
    The central bank noted that the rise in consumer prices has pushed inflationary expectations above its target range but some of the temporary factors behind the rise, such as food, utilities and the depreciation of the sol, have now been partially reversed.
    Excluding food and energy, the central bank said inflation rose to 3.8 percent in February from 3.4 percent in January and expectations for inflation this year were 3.5 percent and between 3.0 and 3.5 percent for 2017.
    The central bank has forecast inflation this year of 3.5 percent, and expects it to move below the upper limit of 3.0 percent between the end of this year and the beginning of 2017. Next year inflation is expected to average 3.0 percent.
    Peru's sol has been depreciating steadily since August 2014 and fell to a nearly 13-year low against the U.S. dollar last month. But since February 26, when it hit 3.55 to the dollar, the sol has been firming and quoted at 3.44 to the dollar today, down less than 1 percent this year.
    Commenting on Peru's economy, the central bank said recent data pointed to a recovery of activity with growth close to potential growth rates.
    Peru's economy grew by an annual rate of 4.7 percent in the fourth quarter of last year, up from 2.9 percent in the third quarter.


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