Thursday, June 11, 2015

Peru holds rates as inflation remains above target

    Peru's central bank held its monetary policy rate steady at 3.25 percent, as expected, saying the rise in May inflation was partly due to higher electricity prices with domestic inflation currently affected by temporary supply-side factors that have been reversing slower than expected.
    The Central Reserve Bank of Peru, which has maintained its rate since cutting it by 25 basis points in January, added that the latest data showed that the economy remained in a weak cycle and economic growth was below potential.
    Peru's inflation rate rose to 3.37 percent in May - above the central bank's upper tolerance range - from 3.02 percent in April.
    The central bank targets inflation of 2.0 percent, plus/minus 1 percentage point.
    Earlier this month the central bank raised its forecast for inflation to 3 percent by the end of the year, up from 2-3 percent in its May biannual report, due to local fuel shortages and a port strike that hit the distribution of imported goods.
    Last month the central cut its growth forecast for this year to 3.9 percent from a forecast in January of 4.8 percent and the 2016 forecast to 5.3 percent from 6 percent.
    Peru's Gross Domestic Product expanded by an annual 1.7 percent in the first quarter of this year, up from a 1.0 percent growth rate in the fourth quarter, sharply weaker than quarterly growth rates of between 4.6 and 6.9 percent seen in 2012 and 2013.
    But in 2014 Peru's growth slowed sharply to 2.35 percent as exports of mineral products dropped.

    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 3.25 percent. This level of the policy rate is compatible with the forecast that inflation will converge to the 2.0 percent target in the 2015-2016 forecast horizon and takes into account that: i) economic activity continues showing levels below its potential level; ii) inflation expectations remain anchored within the target range; iii) international indicators show mixed signals of global economic recovery, as well as high volatility in external financial markets and foreign exchange markets, and iv) domestic inflation has been affected by temporary supply-side factors that have been reversing more gradually than expected.

2. Inflation in May showed a rate of 0.56 percent, as a result of which the interannual rate of inflation rose from 3.02 percent in April to 3.37 percent in May. The monthly rate of inflation is explained by the increase observed in the prices of electricity rates (5.3 percent), meals outside the home (0.5 percent), urban fares (0.7 percent), and gasoline and lubricants (3.9 percent). Inflation without food and energy showed a rate of 0.25 percent, as a result of which the interannual rate of inflation rose from 2.74 percent in April to 2.84 percent in May.

3. Recent indicators of economic activity and business and consumer expectations continue showing a weak economic cycle, with lower GDP growth rates than the potential output levels.

4. In June, the Central Bank has continued lowering the rate of reserve requirements in domestic currency –from 7.0 to 6.5 percent– with the aim of supporting the growth of credit in soles.

5. The Board oversees the inflation forecasts and inflation determinants, and stands ready to make changes in its monetary policy instruments if it is necessary.

6. The Board of the Central Bank also approved to lower 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: 2.00 percent. b. Direct repos and rediscount operations: 3.80 percent. c. Swaps: a commission equivalent to a minimum annual effective cost of 3.80 percent.

7. The Monetary Program for the following month will be approved on the Board meeting to be held on July 9, 2015."


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