Peru's central bank again maintained its monetary policy rate at 4.25 percent, citing the gradual reversal of inflation expectations and the impact of higher food, utility prices and the exchange rate on inflation, economic growth that is close to its potential and a mixed global economic recovery.
The Central Reserve Bank of Peru (BRCP), which paused in its tightening cycle in March after four rate hikes, added that it expects inflation to return to within its target range before the end of this year.
Peru's inflation rate fell further to 3.34 percent in June from 3.54 percent and down from a 2016-high of 4.61 percent in January, approaching the central bank's target of 1 percent to 3 percent around a 2.0 percent midpoint.
The central bank added that inflation expectations had continued to fall from an expected rate of 3.2 percent in the next 12 months to 2.9 percent in 2017 and 2.5 percent in 2018.
At its meeting in May, the central bank's board lowered its forecast for inflation this year to 3.4 percent from 3.5 percent and the 2017 forecast to 2.9 percent from 3.0 percent.
In June it lowered the 2018 forecast to 2.5 percent from the 2.6 percent it forecast in May.
The Central Reserve Bank of Peru issued the following statement:
"1. The Board of the Central Reserve Bank of Peru approved to maintain the monetary policy
interest rate at 4.25 percent.
The Board has taken this decision considering that:
i) Inflation expectations have continued to reverse gradually;
ii) The effects of the rise in the prices of some food products and utilities as well as the
effects of the exchange rate on inflation have been reversing;
iii) Local economic activity has been showing a pace of growth close to its potential growth
iv) The global economy continues showing mixed signals of recovery in terms of production
and employment as well as lower volatility in financial markets.
2. The Board oversees the inflation forecasts and inflation determinants to evaluate the
convenience of making additional adjustments in the monetary policy rate. Inflation is
expected to return to be within the target range before the end of the year.
3. Inflation in June showed a rate of 0.14 percent, as a result of which the year-to-year rate of
inflation has fallen from 3.5 percent in May to 3.3 percent in June. The items that explained
the rate of inflation in June were gasoline, fish, and cigarette. Inflation without food and
energy recorded a rate of 0.2 percent, as a result of which the year-to-year rate remained at
3.3 percent. Inflation expectations have continued to decrease gradually and continue
showing a a declining path from an expected rate of 3.2 percent in the next 12 months to a
rate of 2.9 percent in 2017 and a rate of 2.5 percent in 2018.
4. The Board of the Central Bank also approved to maintain the annual interest rates on lending
and deposit operations in domestic currency (not included in auctions) between BCRP and
the financial system, as specified below:
a. Overnight deposits: 3.0 percent.
b. Direct repos and rediscount operations: i) 4.80 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 4.80 percent.
5. The Board will approve the Monetary Program for August at the Board meeting that will be
held on August 11, 2016."