Peru’s Central Bank Tightens Further

The central bank of Peru (BCRP) increased rates by 25 bps as expected by the market and RGE, taking the policy rate to 3.75% on March 10. Similar to the previous month, the press release highlights that the hike is preventive in a scenario of high international food and energy prices, and seeks to limit the impact of supply-side shocks on private expectations, in the context of strong domestic demand.

According to the bank, economic indicators continue to signal robust domestic demand dynamics, while global activity seems to be picking up. However, this month, the release also mentions that risks associated with the fiscal stance of some industrialized countries linger, as do those associated with the ongoing crisis in the Middle East and North Africa. According to the press release, headline and core inflation both remain around the 2% mid-point target of the BCRP, and supply-side factors are the main drivers of prices.

In our view, the BCRP will remain on an ahead-of-the-curve strategy to reduce inflation pressures deriving from both demand- and supply-side factors. We expect the BCRP to drive the monetary policy rate to 4.25% by the end of the year, as well as use alternative tools to control liquidity in the economy.

Peruvian Inflation (y/y),Target Range and Monetary Policy Rate

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Source: INEI, BCRP and RGE

Editor’s Note: This post is excerpted from a much longer analysis available exclusively to RGE clients, Mixed Inflation Dynamics in the LatAm Region.