Flash Report /

Peru hikes again as headline inflation eases

  • Central bank increased its policy rate by 25bps as expected to 7.25%, its 16th consecutive rate increase

  • It brings the cumulative increase to date to 700bps since the bank's post-Covid tightening cycle began in August 2021

  • Forward guidance unchanged and points to fine tuning as inflation shows signs of easing

Peru hikes again as headline inflation eases
Stuart Culverhouse
Stuart Culverhouse

Chief Economist & Head of Fixed Income Research

Tellimer Research
11 November 2022
Published byTellimer Research

The Central Reserve Bank of Peru (BCRP), as expected, raised its policy rate by another 25bps, to 7.25%, at at its monthly meeting yesterday as its tightening cycle continues.

It was the bank's 16th consecutive rate hike and brings the cumulative increase to date to 700bps since the post-Covid tightening cycle began in August 2021, taking the policy rate to its highest level in over two decades.

The decision was expected according to the Bloomberg analyst survey, although the survey itself was finely balanced. Seven of the 12 analysts expected a 25bps hike while five forecast no change.

It was the third successive 25bps increase, coming after a run of 50bps moves, after the central bank moderated the pace of increase in September. The last hike was at the central bank's previous meeting in October.

Peru monetary policy rate (%)

The central bank continued its rate hikes despite the recent easing in headline CPI inflation. The annual rate of inflation eased to 8.28% yoy in October, down from 8.53% in September, and a high of 8.81% in June. However, the BCRP noted an increase in core inflation, from 5.51% in September to 5.72% in October.

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.

Meanwhile, we note the Sol has been relatively stable against the US dollar in recent months.

Peru inflation (% yoy)

The central bank also noted a further decrease in one-year-ahead expected inflation, from 4.89% in September to 4.78% in October. Inflation in 2023 is expected at 4.19%, above the upper limit of the inflation target range.

With the rate increase, the real interest rate has become less negative (down to -1% from -3% in the summer), while it is more firmly in positive – and restrictive territory – based on expected inflation. The real interest rate, based on inflation expectations, now stands at c2.5%, compared to c0.6% in June, which is well above the BCRP's neutral level (estimated at 1.5%).

As such, this may raise hopes that the BCRP's tightening cycle is coming to an end, although we think some caution may still be required (especially given the rise in core inflation), while the bank left unchanged its wording on forward guidance from October; when, we think, a slight change in wording signalled the bulk of tightening is now over, and future changes may be just fine-tuning.

The BCRP's next monetary policy meeting will take place on 7 December.