Peru Lifts Key Rate for First Time in 5 Years as Sol Weakens
Peru raised its key interest rate for the first time in five years after inflation accelerated faster than expected and political turmoil sank the currency.
The central bank lifted its benchmark rate a quarter percentage point, to 0.5%, matching the estimates of two of seven economists surveyed by Bloomberg. One had forecast a bigger increase of half a percentage point, while the other four had predicted no change.
Inflation has accelerated in emerging markets from India to Mexico in recent months, as businesses pass on higher commodity prices to consumers, and demand picks up before supply chains are fully recovered from the pandemic. Peru’s policy makers are grappling with those same global trends, as well as with home-grown market volatility, joining a growing list of central banks tightening ultra-low monetary policy.
After the decision, the Peruvian sol gained 0.4% to 4.0750 per dollar on Friday morning, after earlier strengthening as much as 1%. The benchmark 10-year local bond rose 0.3% to 103.7 cents on the dollar.
Even after the increase, the interest rate remains at an “expansionary” level, which the economy will continue to need while the negative effects of the pandemic on inflation persist, the bank said in its policy statement, released after markets closed.
“We are especially attentive to new information regarding inflation expectations and the evolution of the economy to consider, if necessary, changes in the monetary policy stance,” the bank said.
Since President Pedro Castillo was sworn in July 28, the nation’s sol has weakened the most among more than 140 currencies tracked by Bloomberg, while bonds and stocks also dropped.
In his first week in office, Castillo rattled investors by naming a prime minister who’s under investigation for being an alleged apologist for terrorists, among other contentious cabinet picks.
Elsewhere in Latin America, Brazil has raised its policy rate by 3.25 percentage points this year, Chile lifted its rate last month, as did Uruguay on Wednesday and Mexico earlier Thursday. Colombia’s central bank indicated that it may soon join the regional trend.
Annual inflation jumped to 3.8% last month, above the upper limit of the target band of 1% to 3%. The bank said consumer price rises should return to this range over the next 12 months.
This drop will be due to the reversal of temporary factors that impact inflation, such as movements in the exchange rate, and a rise in international prices of food and fuel, the bank said. The economy is operating below its full capacity, which will also tend to slow inflation, it added.
Reports that long-time central bank President Julio Velarde would stay on, briefly calmed markets in recent days.
The 11% slump suffered by Peru’s economy last year was the deepest among major economies in Latin America, and it won’t recover to its pre-pandemic level until 2022, according to a forecast from the International Monetary Fund.
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