Thursday, March 8, 2018

Peru cuts rate another 25 bps, will consider further cuts

      Peru's returned to its monetary easing campaign and lowered its policy rate by another 25 basis points to 2.75 percent, citing declining inflation and inflation expectations, and said it would consider further changes to its policy rate if necessary.
      The Central Reserve Bank of Peru (BCRP) left its rate steady last month after cutting it in January and has now cut it six times by a total of 150 basis points since May 2017.
       Peru's inflation rate fell further to 1.18 percent in February from 1.25 percent in January and is projected to drop below 1.0 percent in March before rising toward 2.0 percent, the midpoint of the central bank's target range of 1-3 percent.
       Expectations for inflation 12 months ahead also continued to decline, BCRP said, adding they called for 2.19 percent in February.
       Peru's inflation rate decelerated sharply in the second half of last year following a rise in the first half after heavy flooding in March, which killed more than 100 people, destroying crops.
       Inflation is now falling as these supply shocks reverse along with an economy that continues to operate below its potential.
       Peru's economy grew by 0.9 percent in the fourth quarter of last year for annual growth of 2.2 percent, down from 2.5 percent in the third quarter.
       BCRP said business expectations deteriorated in February but remain on the optimistic side.
       Peru's sol has been trending firmer since early 2017 and was trading at 3.26 to the U.S. dollar today, largely unchanged since the start of this year.

      The Central Reserve Bank of Peru issued the following statement:

1. The Board of the Central Reserve Bank of Peru approved to lower the monetary policy interest rate to 2.75 percent. This decision takes into account the following factors:
  1. Inflation in February continued declining and showed a rate in the lower band of the inflation target range for the fourth consecutive month due mainly to the reversal of the supply shocks and due to a level of economic activity lower than the potential level of growth. Inflation in March is projected to fall below 1.0 percent and to gradually converge thereafter to 2.0 percent. Moreover, trend inflation measurements continue decreasing and are expected to remain close to the middle of the target range during this year;
  2. Expectations of inflation in 12 months continued decreasing and registered a rate of 2.19 percent in February 2018;
  3. Economic activity continues to grow at levels below its potential level of growth, and
  4. The world economy continues to show positive indicators, although uncertainty in
    international financial markets has increased.
  1. The Board pays close attention to new data on inflation and inflation determinants to consider the convenience of making additional adjustments in the Central Bank’s monetary policy stance should it be necessary.
  2. Recent indicators of inflation and activity reflect the following:
    1. Inflation in February showed a rate of 0.25 percent, as a result of which the year-to-year inflation rate fell from 1.25 percent in January to 1.18 percent in February 2018. Inflation without food and energy recorded a rate of 0.14 percent, as a result of which the year-to- year rate remained at 1.97 percent, also within the target range.
    2. The indicators of business expectations deteriorated in February, although they continue to be on the optimistic side.
  3. 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:
    1. Overnight deposits: 1.50 percent.
    2. Direct repos and rediscount operations: i) 3.30 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.
    3. Swaps: a commission equivalent to a minimum annual effective cost of 3.30 percent.
  4. The Monetary Program for the month of April will be approved on the Board Meeting of April 12, 2018."


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