Peru’s central bank lowered its monetary policy rate for the second time this year amid low inflation but said this decision didn’t necessarily imply further rate cuts and it’s board would pay close attention to inflation and its determinants when assessing the future monetary policy stance.
The Central Reserve Bank of Peru (BCRP) cut its reference rate by 25 basis points to 2.25 percent and has now cut it by 50 basis points this year following a cut in August, its first cut since March 2018.
Inflation in Peru rose slightly to 1.88 percent in October from 1.85 percent in September and excluding food and energy, inflation rose to 2.34 percent from 2.16 percent.
However, excluding one-off increases in water, electricity and transportation rates, the monthly inflation rate would have been negative, said BCRP, which targets inflation of 2.0 percent, plus/minus 1 percentage point.
Inflation is expected to remain within the target range and close to 2.0 percent within the forecast horizon but with a downside bias due to the possibility of a lower than expected increase in domestic demand.
Economic conditions point toward a narrowing of the output gap, with a recovery in non-primary industries partly offsetting a weak performance by primary industries in the first 9 months of the year and a slowdown in public investment expected to reverse in the rest of the year.
BCRP added business conditions had improved slightly in October and risks to global growth had also decreased on a moderation of trade tensions.
Peru’s economy slowed to growth of only 1.2 percent in the second quarter of the year from 2.4 percent in the first quarter.
BCRP has forecast growth this year of 2.7 percent and 3.8 percent in 2020.
Peru’s sol has been relatively steady in recent years and was trading around 3.34 to the U.S. dollar today, up 1.2 percent this year.
The Central Reserve Bank of Peru issued the following statement:
“1. The Board of Directors of the Central Reserve Bank of Peru (BCRP) decided to cut the reference rate from 2.50 to 2.25 percent, in light of the following developments:
- Year-on-year inflation is expected to remain within the target range close to 2.0 percent over the forecast horizon, with a downside bias due to the possibility of a lower-than expected increase in domestic demand.
- Monthly inflation was 0.11 percent in October, bringing up year-on-year inflation to 1.88 percent, from 1.85 percent in September. With monthly inflation excluding food and energy at 0.23 percent in October, the year-on-year figure increased to 2.34 percent, from 2.16 percent in September due to a transitory increase in water, electricity, and transportation rates. Monthly inflation would have been negative without these items.
- One-year ahead expected inflation as of October remains at 2.2 percent.
- Primary industries’ weak performance in January-September was partially offset by a recovery in non-primary industries. The slowdown in public investment over the same period is expected to revert in the remainder of the year. Business conditions expectations improved slightly in October. Economic activity indicators point to a more gradual closure of the output
- Global growth risks decreased as trade tensions moderated.
2. This decision does not necessarily imply additional reductions in the policy rate. The BCRP Board pays close attention to new information on inflation and its determinants in assessing future changes in the monetary policy stance.
3. The Board also decided to reduce the interest rates on BCRP off-auction credit and deposit operations in domestic currency with financial entities.
- Overnight deposits: 1.00 percent per year.
- Direct security/currency repo and rediscount operations: i) 2.80 percent per year for financial
entities’ first 10 operations over the last 12 months; and ii) the rate fixed by the BCRP Monetary and Foreign Exchange Operations Committee for operations other than financial entities’ first 10 operations over the last 12 months.
- Dollar swaps: a fee equal to a minimum annual effective cost of 2.80 percent.
4. The BCRP Board’s next monetary policy session will take place on December 12, 2019.”
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