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Peru central bank hikes again but signals new phase of moderation

  • Central bank increased its policy rate by 25bps as expected to 7%, its 15th consecutive rate increase

  • It brings the cumulative increase to date to 675bps since the bank's post-Covid tightening cycle began in August 2021

  • Slight change in statement's wording suggests bulk of tightening is over, opening door to new phase of fine tuning

Peru central bank hikes again but signals new phase of moderation
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
7 October 2022
Published byTellimer Research

The Central Reserve Bank of Peru (BCRP) raised its policy rate again yesterday at its monthly meeting, with a 25bps hike to 7.0%, its 15th consecutive increase. The decision was expected, according to the Bloomberg consensus survey.

It was the second successive 25bps increase, following the smaller than expected hike last month, as the central bank moderated the pace of increase. It comes after a run of 50bps increase. The latest move has resulted in a cumulative increase to date of 675bps since the bank's post-Covid tightening cycle began in August 2021, taking the policy rate to its highest level in two decades.

Peru monetary policy rate (%)

The decision comes after a small uptick in inflation, which suggests, even if an aberration, the central bank cannot celebrate just yet. CPI inflation rose from 8.40% yoy in August to 8.53% in September, due to increases in food and fuel prices, and bucking the trend of three successive monthly declines in the annual rate from its recent peak of 8.81% in June. In addition, the BCRP noted that core inflation rose from 5.39% yoy in August to 5.51% in September.

Inflation is therefore still well above the BCRP's 1-3% target range, but the central bank retained its forecast of a downward trend in the annual rate and a return to the target range in the second half of next year. This, it says, is due to a moderation of the impact of international food and fuel prices, and to a reduction in inflation expectations. It noted one-year-ahead expected inflation decreased from 5.10% to 4.89% between August and September.

Peru inflation (% yoy)

With the rate increase, the real interest rate (based on expected inflation) is, therefore, more firmly in positive territory, and has actually increased further into restrictive territory, standing at 2.11% now compared with 1.65% in August and just 0.61% in June, and is now above the BCRP's neutral level (estimated at 1.5%).

This may be behind the slight change in wording in the bank's monetary policy statement yesterday, from "continuing to normalise" the monetary policy stance in September to "continuing to adjust" it. This suggests they see normalisation as having been achieved, with the bulk of tightening now over, and future changes may be just fine-tuning.

As a result, this may raise hopes that BCRP's tightening cycle is coming to an end, although we think some caution may still be required. The president of the central bank, Julio Velarde, was reported last week saying they probably won’t have to raise borrowing costs much further, according to Bloomberg.

The BCRP's next monetary policy meeting will take place on 10 November.