Peru’s Central Bank Delivers Smaller-Than-Forecast Rate Hike

María Cervantes
·2 min read
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(Bloomberg) -- Peru’s central bank delivered a smaller-than-expected increase to its benchmark interest rate after inflation eased for a second consecutive months.

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The central bank’s board led by Julio Velarde increased borrowing costs by a quarter of a percentage point to 6.75%, as predicted by only two of eight economists surveyed by Bloomberg. The other six expected a bigger boost of 50 basis points.

It was the 14th straight hike in a cycle that has added 650 basis points to the key rate, taking it to the highest level in 20 years.

Peru’s Policy Rate

Peru’s move follows Chile’s bigger-than-expected rate increase of 100 basis points on Tuesday and the European Central Bank’s 75 basis-point hike earlier on Thursday.

Policy makers said in a statement accompanying their decision that expectations for price increases over the next 12 months fell to 5.10% from 5.16% while several economic indicators improved in August.

“The board of directors reaffirms its commitment to adopt the necessary actions to ensure the return of inflation to the target range in the horizon of projections,” they wrote.

Peru’s inflation rate has fallen for two consecutive months, to 8.4% in August. While much higher than the 2% target, plus or minus 1 percentage point, some economists say the Andean country’s monetary tightening cycle is approaching its end.

Economic Reactivation Plan

Finance Minister Kurt Burneo has asked for coordination between monetary and fiscal policies as he seeks to ensure the economy grows 3.3% this year. Earlier on Thursday, he unveiled a 3 billion sol ($773 million) plan to boost growth.

During the event, he also said he expects more gradual rate hikes in the coming months to avoid capital outflows while the US Federal Reserve keeps raising borrowing costs.

“Although increases will be more spaced out and gradual, they can still lead to a negative impact on demand, consumption and investment,” Burneo said, stressing his respect for the central bank’s independence.

Peru’s political instability continues to add to economic uncertainty as a congressional committee reviews a bill calling for an early general election, following two failed attempts to impeach President Pedro Castillo. Businessman Ricardo Marquez and the leader of the 2005 uprising Antauro Humala have already announced they intend to run for president.

(Updates with details from statement in paragraphs 5-6.)

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