Peru’s central bank has raised its key benchmark interest rate from 3.5% to 3.75% in an effort to slow rising inflation and a weakening currency.
In a statement, Peru’s central bank noted that inflation above target was caused by temporary economic conditions and should not affect prices throughout the economy. The statement also highlighted mixed signals from the international economy and forecasted that Peru’s economic growth would accelerate in the fourth quarter of this year.
“Currency volatility is what’s weighing most on inflation and monetary policy,” a Scotiabank economist in Peru told Bloomberg. “The currency’s drop in November is going to affect inflation this month and expectations for next year. It’s a crucial moment as companies are finalizing their budgets for 2016.”
Peru surprised economists last September when it raised its interest rate 25 basis points to 3.5% as inflation grew a full percentage point over its target range of 1% to 3%.
Last night’s hike did not come as a surprise as annual inflation increased from 3.7% in October to 4.2% in November as the sol fell to a nine-year low against the dollar. Fifteen of 17 economists surveyed by Reuters and all 18 consulted by Bloomberg predicted that central bank president Julio Velarde would raise rates this month.
The dollar began its advance against the sol in the second half of 2014 and is up 14% over the last 12 months. The central bank has spent over $24 billion in the last year to slow the sol’s fall, leaving its dollar reserves at half the level of one year ago. Last month the central bank hinted at a December rate hike to defend the currency and stem inflation.
The central bank statement said it sees inflation falling into its target range next year.
The bank increased its overnight deposits rate by 25 basis points to 2.5%,
The sol strengthened slightly yesterday to 3.374 per dollar.
Sources
PROGRAMA MONETARIO DE DICIEMBRE 2015 BCRP ELEVA LA TASA DE INTERÉS DE REFERENCIA A 3,75% (Central Reserve Bank of Peru)
Banco Central de Reserva eleva tasa de referencia a 3.75% (Andina)
UPDATE 2-Peru central bank hikes interest rate to cool inflation (Reuters)
Peru Raises Rate as Sol Slump Pushes CPI to Three-Year High (Bloomberg)
