Peru's central bank kept its monetary policy rate steady at 2.25 percent, noting the risks to global growth have eased but the impact of recent geopolitical events on international energy prices is still uncertain.
The Central Reserve Bank of Peru (BCRP), which cut its rate twice in 2019, most recently in November, also said the rate had been maintained as inflation is expected to be around 2.0 percent over the forecast horizon but with a moderate downward bias due to the possibility of lower-than-expected increase in domestic demand.
Last month the central bank lowered its estimate of 2019 economic growth to 2.3 percent from a previous 2.7 percent but maintained its outlook for this year of 3.8 percent.
Today BCRP said expectations of business expectations had remained stable in December from November while indicators of economic activity point to a gradual closing of the output gap.
Last year Peru's economy was hit by a combination of slower global demand for its mining output, political uncertainty and a decline in public investment, with the fiscal deficit shrinking to an estimated 1.7 percent of gross domestic product.
This year the fiscal deficit is seen narrowing further to 1.6 percent.
Peru's mining sector accounts for around 15 percent of GDP and 60 percent of exports and Julio Velarde, BCRP governor, said on Dec. 20 higher mining output this year will boost growth.
Peru's inflation rate rose slightly to 1.9 percent in December from 1.87 percent in November and the central bank has forecast 2.0 percent inflation for 2020, in line with its target of 2.0 percent, plus/minus 1 percentage point.
Peru's sol has been relatively stable in the last four years and was trading at 3.32 to the U.S.dollar today, slightly down from 3.31 at the start of this year but up 1.8 percent since the start of 2019.
Last month the International Monetary Fund (IMF) called on BCRP to greater exchange rate flexibility to help absorb external shocks and promote financial development as the level of dollarization in the country is declining.
BCRP on occasions intervenes in the foreign exchange market, reflecting concern over liability dollarization, but loan dollarization is now at 39 percent for firms and 10 percent for households so greater exchange rate flexibility carries lower risks.
"Limiting central bank intervention to cases of disorderly market conditions could help reduce dollarization further, encourage the use of hedging instruments, and strengthen the interest rate channel of monetary policy," IMF said on Dec. 3.
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 maintain the reference at 2.25 percent, in light of the following developments:
i. Year-on-year inflation is expected to be around 2.0 percent over the forecast horizon, with a moderate downside bias due to the possibility of a lower-than-expected increase in domestic demand. ii. Monthly inflation was 0.21 percent in December, consequently, year-on-year inflation remained at 1,9 percent in December 2019. With monthly inflation excluding food and energy at 0.34 percent in December, the year-on-year figure also remained at 2.3 percent.
iii. One-year ahead expected inflation as of December remained at 2.2 percent.
iv. The weak performance of primary industries and General Government investment in 2019 was attenuated by the activity in non-primary industries. Business conditions expectations as of December remained stable with respect to November, while economic activity indicators point to a gradual closure of the output gap.
v. Global growth risks from trade tensions have attenuated, although the impact of the recent geopolitical events on international energy prices is still uncertain.
2. The BCRP Board pays close attention to new information on inflation and its determinants in assessing future changes in the monetary policy stance.
3. The Board also decided to maintain the interest rates on BCRP off-auction credit and deposit operations in domestic currency with financial entities.
i. Overnight deposits: 1.00 percent per year.
ii. Direct security/currency repo and rediscount operations: i) 2.80 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 2.80 percent.
4. The BCRP Board’s next monetary policy session will take place on February 13, 2020."
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