Flash Report /

Peru's central bank hikes again, as expected

  • The central bank has increased its policy rate by 50bps to 6%, its 12th consecutive rate increase

  • The decision came as June CPI rose more than expected, at 8.8% yoy, a 25-year high

  • But central bank repeated its view that inflation should decline next month; meanwhile, the political crisis continues

Peru's central bank hikes again, as expected
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

Tellimer Research
8 July 2022
Published byTellimer Research

The Central Reserve Bank of Peru (BCRP) lifted its policy rate again yesterday, for the 12th consecutive time, at its monthly meeting, with another 50bps hike to 6.0%. The decision was expected, according to the Bloomberg consensus survey.

The move was also the 11th successive 50bps increase (the first hike was 25bps), resulting in a cumulative increase to date of 575bps since the bank's post-Covid tightening cycle began in August 2021.

Peru monetary policy rate (%)

The decision comes as CPI inflation for June, released last week, rose much more than expected at 8.81% yoy – a 25-year high – compared with the Bloomberg consensus of 8.06%, and up from 8.09% in May.

The higher inflation, which is well above the central bank's 1-3% target range, is due to significant increases in international food and fuel prices. Core inflation also rose from 4.26% yoy in May to 4.95% in June, while inflation expectations also rose, according to the BCRP.

Peru inflation (% yoy)

But, despite the further and unexpected rise in inflation, the BCRP expects inflation to have peaked. It stuck to its previous view that inflation is expected to decline (on a yoy basis) from July of this year, mainly due to base effects, although we think that seems ambitious given the pace of June's increase (+1.2% mom compared with the consensus of +0.4% and +0.4% in May). Moreover, the central bank expects inflation to return to the target range between the second and the third quarter of next year.

Investors may therefore be turning more optimistic that the tightening cycle is nearing its end. We are less sure, given still negative real rates and rising inflation expectations.

Meanwhile, the political crisis facing President Pedro Castillo continues. Last week it forced him to resign from his Peru Libre party, while protests against rising living costs will only add to the pressure on the government. This has seen recent strikes from truckers and farmers over higher fuel and fertiliser costs.

The bank's next monetary policy meeting will take place on 11 August.