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Peru

Peru's central bank surprises with smaller-than-expected rate increase

  • The BCRP increases its policy rate again but this time by a lower-than-expected 25bps, to 6.75%

  • It's the 14th consecutive rate increase in this cycle, but the 25bps move ends the pattern of 12 consecutive 50bps hikes

  • The decision comes after the recent fall in inflation and may signal the tightening cycle is coming to an end

Peru's central bank surprises with smaller-than-expected rate increase
Stuart Culverhouse
Stuart Culverhouse

Head of Sovereign & Fixed Income Research

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Tellimer Research
9 September 2022
Published byTellimer Research

The Central Reserve Bank of Peru (BCRP) surprised with a smaller-than-expected rate hike at its monthly meeting yesterday. It announced a 25bps increase, taking the policy rate from 6.5% to 6.75%, compared with the expectation of another 50bps increase in the Bloomberg consensus survey.

The move marks the 14th consecutive rate rise in this cycle, with the most recent change coming last month and before that in July, but ends the pattern of 12 consecutive 50bps increases (the first hike in this cycle was 25bps). This has resulted in a cumulative increase to date of 650bps since the central bank's post-Covid tightening cycle began in August 2021.

Peru monetary policy rate (%)

The decision comes after the recent fall in inflation, with two successive months of lower CPI prints. This shows inflation having fallen from its cyclical peak of 8.81% yoy in June (and a 25-year high) to 8.74% in July and 8.4% in August.

While this is still well above the BCRP's 1-3% target range, it is clearly becoming more confident that inflation is on a downward trend. The central bank expects inflation to return to the target range in the second half of next year.

Peru inflation (% yoy)

In addition, the BCRP also noted the declines in core inflation, from 5.44% in July to 5.39% in August, and in one-year-ahead inflation expectations between July and August, from 5.16% to 5.10% (and 5.35% in June).

With the rate increase, the real interest rate (based on expected inflation) is, therefore, more firmly in positive territory, standing at 1.65% now compared with 1.34% in August and 0.61% in June, and is now just above the BCRP's neutral level (estimated at 1.5%), in the central bank's quest to normalise monetary policy.

As a result, the BCRP may be signalling that the tightening cycle is coming to an end, or at least a slowing in the pace of increase, a view that we noted in July seemed to be premature but that now looks more plausible. However, we still caution that two good inflation numbers do not make a summer.

Moreover, as a small open economy, Peru may not be able to buck the outlook for higher US rates (and global market volatility), which might otherwise put pressure on its domestic currency. Hence, further rate increases cannot be ruled out.

Meanwhile, the political crisis facing President Pedro Castillo continues.

The BCRP's next monetary policy meeting will take place on 6 October.