Peru's central bank lowered its monetary policy rate for the first time in 17 months but said this did "not necessarily imply additional reductions in the policy rate" as the annual inflation rate is still expected to remain within the target range and close to 2 percent albeit with a downside bias due to a possible lower-than-expected increase in domestic demand.
The Central Reserve Bank of Peru (BCRP) cut its policy rate by 25 basis points to 2.50 percent, its first rate cut since March 2018. Between March 2017 and March last year BCRP lowered its rate by 150 basis points and the last time the rate was raised was in February 2016.
In its statement, the central bank's board said the rate was lowered in light of inflation in July that was within its target range, one-year ahead expected inflation was 2.32 percent, primary industries showed a weak performance and non-primary industries showed slowing growth momentum while "global growth risks persist and the recent escalation in trade tensions exacerbated international financial volatility."
Peru's inflation rate eased to 2.11 percent in July from 2.29 percent in June but still within BCRP's target range of 2.0 percent, plus/ minus 1 percentage point.
The Central Reserve Bank of Peru issued the following statement:
1. The Board of Directors of the Central Reserve Bank of Peru (BCRP) decided to cut the reference rate from 2.75 to 2.50 percent, thereby loosening the monetary policy stance, in light of the following developments:
i. Year-on-year inflation and inflation trend indicators as of July were within the BCRP’s target range; ii. One-year ahead expected inflation as of July was 2.32 percent;
iii. Primary industries show a weak performance as a result of temporary supply shocks, while non-primary industries show slowing growth momentum. The slowdown in public investment in January-July is expected to revert in the remainder of the year; and
iv. Global growth risks persist and the recent escalation in trade tensions exacerbated international financial volatility.
2. This decision does not necessarily imply additional reductions in the policy rate. The BCRP Board pays close attention to new information on inflation and its determinants in assessing future changes in the monetary policy stance. Year-on-year inflation is expected to remain within the target range close to 2.0 percent over the forecast horizon, with a downside bias due to the possibility of a lower-than-expected increase in domestic demand.
3. According to recent inflation and economic activity indicators:
i. Monthly inflation was 0.20 percent in July, bringing down year-on-year inflation to 2.11 percent, from 2.29 percent in June. With monthly inflation excluding food and energy at 0.12 percent in July, the year-on-year figure decreased to 2.15 percent, from 2.30 percent in June.
ii. Business conditions expectations continued its moderation in July. Non-primary activity indicators continue to point to a more gradual closure of the output gap.
4. The Board also decided to reduce the interest rates on BCRP off-auction credit and deposit operations in domestic currency with financial entities.
i. Overnight deposits: 1.25 percent per year.
ii. Direct security/currency repo and rediscount operations: i) 3.05 percent per year for financial entities’ first 10 operations over the last 12 months; and ii) the rate fixed by the BCRP Monetary and Foreign Exchange Operations Committee for operations other than financial entities’ first 10 operations over the last 12 months.
iii. Dollar swaps: a fee equal to a minimum annual effective cost of 3.05 percent.
5. The BCRP Board’s next monetary policy session will take place on September 12, 2019"
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