Peru: Central Bank raises rates for seventh straight meeting in February
At its 10 February meeting, the Central Bank of Peru raised its key policy interest rate by 50 basis points to 3.50%, pushing it to its highest level since October 2017. The decision was in line with market analysts’ expectations and took the cumulative total of hikes since August 2021 to 325 basis points.
The raise reflected continued trepidation around spiraling inflation in recent months—the annual rate ended 2021 at a near 13-year high of 6.4%—driven largely by a relatively weaker sol and higher food and energy prices. While inflation is expected to fall back within the 1.0%–3.0% target range by the end of this year, heightened political uncertainty and its effect on exchange rates keep price pressures elevated in the short term, giving the Bank enough cause to raise rates once again.
Looking ahead, the Bank repeated that it is “continuing to normalize its monetary policy stance”, but in a potentially less hawkish move, it dropped its previous statement that it “sees the convenience of continuing the normalization of monetary policy in the next months”. Nevertheless, the majority of panelists see rates being raised further during the first quarter of 2022.
Commenting on the outlook, Sergio Armella, economist at Goldman Sachs, stated:
“Despite the backdrop of slower growth and January’s inflation surprise to the downside, short- and medium-term inflation expectations continue to deteriorate and the policy stance will remain accommodative in coming months as the real ex-ante policy rate remains negative. Furthermore, we expect inflation to rise in the coming months and remain elevated. Consequently, our view is that further rate hikes are warranted (at least to a neutral policy stance) given the challenging inflation outlook and heightened policy and political uncertainty and risk.”
The next monetary policy meeting is scheduled for 10 March.