Peru lowers rate 25 bps, to cut further if necessary

     Peru's central bank lowered its monetary policy rate by 25 basis points to 4.00 percent, a move that was expected by many economists following its April guidance and a slowdown in economic growth from flooding, and said it would keep an eye on inflation to see if further changes to its monetary policy stance were necessary.
     It is the first change in rates by the Central Reserve Bank of Peru (BCRP) since it wrapped up a 100 basis-point tightening cycle in February 2016 and the first rate cut since January 2015.
     Reflecting slower economic growth in the first quarter of this year, the central bank lowered its 2017 growth forecast to 2.5 - 3.2 percent from last month's forecast of 3.0 - 3.5 percent.
     In the wake of flooding in March, the central bank lowered its growth forecast from 4.3 percent and held out the prospect of lower rates if domestic demand didn't improve.
     Last month the BCRP lowered the minimum reserve requirement for domestic currency deposits by 100 basis points to 5.0 percent, releasing 541 million soles to help stimulate credit.
     In its previous statement from April, the board said it was paying close attention to the unwinding of supply shocks to inflation and it could ease its policy in the short term.
     The central bank's board said today that its rate cut took into account that supply shocks, which  pushed up inflation in the first quarter, would reverse, that inflation expectations are temporarily close to the bank's upper inflation target range, that the pace of domestic economic activity has continued to slow down although it is expected to recover due to higher government spending. and higher export prices, and the gradual recovery of the global economy.
      Consumer prices in Peru spiked in March to 3.97 percent from 3.25 percent in February before easing to 3.69 percent in April as food supply recovered following rains that triggered mudslides and destroyed roads and croplands from the local El Nino phenomenon.
    The BCRP, which targets inflation of 1-3 percent, added that business expectations had recovered in April, reflecting the transitory nature of a first quarter economic slowdown.
     Last year Peru's economy grew by 3.9 percent, up from 2.3 percent in 2015 and the highest growth  rate in three years.
     The Central Reserve Bank of Peru issued the following statement:
       
   1. The Board of the Central Reserve Bank of Peru approved to lower the monetary policy interest rate by 25 basis points to 4.00 percent.

This level of the benchmark rate is compatible with an inflation forecast in which inflation converges to the target range during 2017 and remains within the target range in 2018. This forecast takes into account the following factors:
i) The reversal of the supply shocks that affected inflation in the first quarter, confirming the trend projected in the previous month;
ii) Expectations of inflation in 12 months are temporarily close to the upper band of the inflation target range;
iii) The pace of growth of domestic economic activity has continued to slow down in recent months, the output showing a pace of growth below its potential growth level. Economic activity is expected to recover in the following quarters as a result of increased government spending and higher export prices, and
iv) The world economy continues to show a gradual recovery, although there is still some uncertainty about developed countries’ policies.

2. The Board oversees new data on inflation and inflation determinants to assess the convenience of making additional changes in the monetary policy stance if deemed necessary.
   
3. Inflation in April recorded a rate of -0.26 percent due to the significant reversal of increases in the prices of some foodstuffs, as a result of which the year-to-year rate of inflation fell from 3.97 percent in March to 3.69 percent in April. Inflation without food and energy showed a rate of 0.09 percent, as a result of which the year-to-year rate increased from 2.72 percent in March to 2.79 percent in April, within the target range.
   
4. The indicators of business expectations have recovered in April, which would be reflecting the transitory nature of the economic slowdown observed in the first quarter of the year. In 2017 GDP is expected to grow between 2.5 and 3.2 percent.
   
5. The Board of the Central Bank also approved to maintain the annual interest rates on lending and deposit operations in domestic currency (not included in auctions) between BCRP and the financial system, as specified below:
   
   1. Overnight deposits: 2.75 percent.
      
   2. Direct repos and rediscount operations: i) 4.55 percent for the first 15 operations
      carried out by a financial institution in the last 12 months, and ii) the interest rate set by the Committee of Monetary and Foreign Exchange Operations for additional operations to the 15 first operations carried out in the last 12 months.
      
   3. Swaps: a commission equivalent to a minimum annual effective cost of 4.55 percent.
      
6. The Board will approve the Monetary Program for June on its meeting of June 8, 2017. 
   

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