Peru’s central bank cut its monetary policy rate for the fourth time this year, a move that was expected by some but not all analysts, and again said it would pay close attention to new information about inflation to consider, if necessary, further changes in its monetary policy stance.
The Central Reserve Bank of Peru (BCRP) cut its policy rate by 25 basis points to 3.25 percent and has now cut the rate by 100 points this year following cuts of the same size in May, July and September as inflation continues to decelerate.
Today’s rate cut comes after the central bank last month also said it would consider lowering its policy rate further and the bank’s president, Julio Velarde, on Wednesday said inflation was likely to end the year at about 1.9 or 2.0 percent thanks to a rapid decrease in consumer prices.
Peru’s headline inflation rate dropped to 2.04 percent in October from 2.94 percent in September, hitting a level not seen since July 2010 as prices continue to decelerate after spiking earlier this year on food shortages following heavy flooding in March that killed more than 100 people.
Excluding food and energy, inflation eased to 2.35 percent in October from 2.45 percent.
In today’s statement, the board of BCRP noted inflation had now reached the middle of its target range of 1-3 percent and inflation is forecast to remain within the range this year and next year. Inflation expectations 12-months ahead remain within the target range and are expected to continue to decline in coming months.
In September the central bank forecast the inflation of 2.3 percent this year but in his comments to journalists Velarde said supply, and not demand, was behind the fall in consumer prices.
Velarde was also quoted by Reuters as saying the annual growth rate would quicken to at least 3.7 precent in the fourth quarter though it probably would not change the bank’s view of a 2.8 percent expansion in 2017.
Peru’s Gross Domestic Product grew by an annual 2.4 percent in the second quarter of this year, up from 2.1 percent in the first quarter, and Velarde said the economy grew by at least 3 percent year-on-year in September thanks to mining and an ongoing recovery in construction activity.
In its statement, the central bank said the pace of economic growth was recovering rapidly and business expectations had continued to improve in October. Expectations remain on the optimistic side although economic growth remains below the potential level.
For 2018 Peru’s government has forecast growth of 4.2 percent and earlier this month in London Velarde said this figure was perfectly attainable and some investment banks had even penciled in growth of 4.4 percent.
Velarde also described the recovery of Peru’s economy as “very V-shaped,” with domestic demand growing at more than 8 percent, construction at almost 9 percent and mining investment was up over 25 percent over the last couple of months.
Peru is the world’s second largest producer of copper, with prices currently at levels not seen since September 2014.
The exchange rate of Peru’s sol has been relatively stable after falling in 2014 and 2015. Today the sol was trading around 3.2 to the U.S. dollar, up 4.7 percent this year.
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 from 3.50 to 3.25 percent. This decision takes into account the following factors:
i. Inflation in October continued decreasing and reached the middle of the inflation target range. The measurements of inflation trends continue declining and are within the target range as well. Moreover, both measurements of inflation are forecast to remain within the target range in 2017 and 2018;
ii. Expectations of inflation in 12 months continued to be within the target range and are expected to continue declining in the following months;
iii. The pace of growth of economic activity is recovering rapidly although it continues to be below its potential growth level in a context of low inflation, and
iv. The world economy continues recovering gradually, although there is some uncertainty associated with an eventual reversal of monetary stimulus in the advanced economies.
2. The Board gives close attention to new data on inflation and inflation determinants to consider the convenience of making additional adjustments in the Central Bank’s monetary policy stance should it be necessary.
3. Recent indicators of inflation and activity reflect the following:
i. Inflation in October recorded a rate of -0.47 percent, as a result of which the year-to-year rate of inflation fell from 2.94 percent in September to 2.04 percent in October. Inflation is expected to remain within this range during 2017 and 2018. Inflation without food and energy showed a rate of 0.02 percent, as a result of which the year-to-year rate fell from 2.45 percent in September to 2.35 percent in October, also within the target range.
ii. The indicators of business expectations have continued to improve in October and remain on the optimistic side, although economic growth remains below its potential level.
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4. 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:
i. Overnight deposits: 2.00 percent.
ii. Direct repos and rediscount operations: i) 3.80 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.
iii. Swaps: a commission equivalent to a minimum annual effective cost of 3.80 percent.
5. The Board of BCRP will approve the Monetary Program for December on its meeting of December 14, 2017.”