Peru raises rate 2nd time, more hikes not implied

     Peru's central bank raised it benchmark interest rate for the second time this year but said its monetary policy stance remains expansionary as the policy rate is still historically low and "the current decision does not necessarily imply a cycle of successive increase in the reference rate."
     The Central Reserve Bank of Peru (BCRP) raised its reference interest rate by another 50 basis points to 1.0 percent and has now raised it 75 points this year following the first rate hike in 5-1/2 years in August.

     

       The Central Reserve Bank of Peru issued the following statement:

" 1. The Board of Directors of the Central Reserve Bank of Peru (BCRP) decided to raise the reference interest rate by 50 bps to 1.0 percent. Monetary policy is still expansionary with a historically low reference interest rate. The current decision does not necessarily imply a cycle of successive increases in the reference rate. This decision takes into account the following developments:

 i. The year-on-year inflation rate increased from 3.81 percent in July to 4.95 percent in August being temporarily above the target range due to factors such as the increase in international prices of food and fuel, as well as the exchange rate. Trend inflation remains around the center of the target range. Year-on- year core inflation was 2.39 percent in August. 

ii. Inflation is expected to return to the target range in the next twelve months and remain within that range for the rest of next year, due to the reversal of the effects of transitory factors on the inflation rate (exchange rate, fuel and grain prices in international markets) and that economic activity will remain below its potential level. 

iii. One-year-ahead expected inflation increased from 3.0 percent in July to 3.1 in August, being slightly above the upper limit of the inflation target range.

 iv. Most leading indicators and expectations about the economy deteriorated in August and remain in pessimistic territory. 

v. Global economic activity is improving and this process is expected to continue in the next quarters, as the vaccination process continues around the world, and significant stimulus packages are implemented in developed countries. 

2. The Board is especially attentive to new information referring to inflation expectations and the evolution of economic activity to consider, if necessary, changes in the monetary policy position. The BCRP will continue to take the necessary steps to sustain the payments system and credit flows. Financial markets were highly volatile in a context of uncertainty and the BCRP’s actions were intended to mitigate this volatility 

3. The Board also decided to raise the following interest rates on its window facility operations in domestic currency with financial entities: 

i. Overnight deposits: 0.85 percent per year. ii. Direct security/currency repo and rediscount operations: 1.5 percent per year. 

4. The BCRP Board’s next monetary policy session will take place on October 7, 2021. "

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