Thursday, September 14, 2017

Peru cuts rate another 25 bps, next move tied to inflation

      Peru's central bank lowered its monetary policy rate for the third time this year and said it would keep an eye on inflation to decide if further changes to the monetary policy stance are necessary.
       The Central Reserve Bank of Peru (BCRP) cut its policy rate by 25 basis points to 3.50 percent and has now cut the rate by 75 basis points this year following cuts of the same size in May and July.
       Today's cut comes after the central bank in August said it was paying close attention to inflation and inflation determinants in order to continue easing its monetary policy stance in the short term.
       This dovish stance was followed by the bank's president, Julio Velarde, who on Aug. 21 said there was room for one or two more rate cuts this year as a rise in inflation to over 3 percent in August was temporary and due to a sharp rise in water utility rates.
       Peru's inflation rate rose to 3.17 percent in August from 2.85 percent in July, topping the central bank's target range of 1-3 percent. Earlier this year Peru's inflation rate spiked due to shortages of some food items following devastating floods in March that killed more than 100 people.
       But the BCRP said a rise the prices of some food products and water tariffs would have only a transitory effect on inflation, and excluding water and lemon prices, inflation was only 2.41 percent.
       Excluding food and energy, inflation rose to 2.57 percent in August from 2.36 percent and overall inflation expectations 12 months ahead continued to decline and reach 2.7 percent in August.
      "Inflation is forecast to converge to the target range during 2017 and remain within this range during 2018," the BCRP said.
       While economic activity in Peru remains below its potential level, the central bank said activity is expected to recover due to higher government and private spending and business expectations remain on the optimistic side.
       The central bank forecast economic growth this year of 2.5 to 3.0 percent, the same as it forecast last month.
        Peru's economy expanded by an annual rate of 2.4 percent in the second quarter of this year, up from 2.1 percent in the first quarter.

       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 by 25 basis points to 3.50 percent.

This level of the benchmark rate is compatible with an inflation forecast in which inflation remains within the target range during 2017 and 2018. This forecast takes into account the following factors:

i) The increase in prices of some food products and water tariffs in August will have a transitory effect on inflation. Measures of inflationary trend are within the target range and are projected to continue to decline in the coming months;
ii) Expectations of inflation in 12 months’ time continued to decrease, standing at 2.7 percent in August;
iii) The pace of growth of domestic economic activity continues to be below its potential growth level. Economic activity is expected to recover as a result of increased government and private spending, and
iv) The world economy continues to show a gradual recovery, although there is still some uncertainty associated with a possible reversal of central banks’ monetary stimulus in developed countries.

2. The Board oversees new data on inflation and inflation determinants to assess the convenience of making additional changes in the monetary policy stance if deemed necessary.

3. Inflation in August recorded a rate of 0.67 percent, as a result of which the year-to-year rate of inflation rose from 2.85 percent in July to 3.17 percent in August.
If it not considers the contribution of the increases in prices of water and lemon, the inflation on the month would be 0.07 percent and the year-to-year inflation, 2.41 percent. Inflation without food and energy recorded 0.38 percent, as a result of which the year-to-year rate rose from 2.36 percent in July to 2.57 percent in August, within the target range (1-3 percent). Inflation is forecast to converge to the target range during 2017 and remain within this range during 2018.

4. The indicators of business expectations have improved and remain on the optimistic side. GDP is expected to grow between 2.5 and 3.0 percent in 2017.

5. 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 BCRP and the financial system, as specified below:
a. Overnight deposits: 2.25 percent.
b. Direct repos and rediscount operations: i) 4.05 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 4.05 percent.

6. The Board will approve the Monetary Program for October on its meeting of October 12, 2017. "


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