Peru Lifts Its Key Rate to Curb Fastest Inflation Since 2009
(Bloomberg) -- Peru’s central bank tightened monetary policy for a fourth straight month after inflation accelerated to its fastest pace in more than 12 years.
Policy makers, led by bank President Julio Velarde, raised their key interest rate by a half-point to 2%, as forecast by six of eight economists surveyed by Bloomberg. One analyst expected an increase of 75 basis points while one saw a quarter-point hike.
Consumer prices in Peru and across Latin America have jumped as economies reopen to pent-up demand and shortages of goods due to tangled supply chains, forcing central banks to increase borrowing costs. Earlier on Thursday, Mexico hiked its reference rate by a quarter point for its fourth consecutive meeting, sticking to a steady adjustment pace, while Uruguay accelerated the withdrawal of monetary stimulus with a 50 basis-point increase.
While inflation in Peru has pushed well above the 1%-to-3% target range, the economy may post the fastest expansion in decades, allowing policy makers space to damp domestic consumer demand.
What Bloomberg Economics Says
“At the current tightening pace of 50 basis points per meeting, Peru’s benchmark rate will reach neutral in six months. Forward guidance from Thursday’s gathering points to a moderation in rate hikes, skipping some meetings or ending the cycle early next year.
Room to move ahead with those plans will depend on new inflation data and prices pressures effectively waning per central bank expectations. The outlook remains challenging.”
-- Felipe Hernandez, Latin America economist
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After the pandemic hit, Peru’s central bank slashed its key interest rate to 0.25%, the lowest in the region, and kept it at that level until early August. Inflation was last within the target range in May, but has more than doubled since then to hit 5.83% in annual terms last month.
Read More: Political Uncertainty Drags on Peru’s Economic Recovery
The economy’s vigorous recovery helps narrow the central bank’s focus to inflation fighting. After suffering the deepest slump among major economies in the region in 2020, Peru’s gross domestic product may grow grow 13.2% this year, according to Velarde.
“We are better than any of the six largest countries in Europe in terms of recovery,” Velarde said at a seminar organized by the Universidad del Pacífico earlier Thursday. Today’s meeting was the first since he and three new board members were sworn in for another five-year term on Nov. 2.
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