(Bloomberg) – Peru’s central bank kept its key interest rate at a record low despite a recent surge in inflation, fulfilling its promise to continue to support an economy ravaged by the pandemic for a long time.
The bank, headed by Governor Julio Velarde, maintained its benchmark rate at 0.25% for the twelfth consecutive month. The decision, which comes just three days before a crowded presidential election that has rocked local markets, was the one expected by the seven economists surveyed by Bloomberg.
The economy of the Andean country has been hit by the coronavirus and by one of the strictest confinements in the region. Peru has also been affected by political instability, which has seen three different presidents pass since November. After two decades of growth, Peru’s gross domestic product contracted 11% last year, a drop deeper than that of any of its neighbors.
Peru maintained rates even when monthly inflation hit 0.84% in March, well above the Bloomberg consensus of 0.66%. The increase was driven by higher food and beverage prices, an increase in fuel costs and a seasonal increase due to back-to-school purchases.
What Bloomberg Economics Says
“The uncertainty prior to Sunday’s elections has contributed to the accumulated depreciation of the currency, but has not changed the outlook for monetary policy. The appreciation of the exchange rate in the last week does not change the perspectives either ”.
– Felipe Hernandez, Latin American Economist
However, core inflation, which excludes more volatile items such as food and fuel, has remained contained and is unlikely to change the central bank’s inflation outlook in the medium term, said Alberto Ramos, Goldman’s chief Latin America economist. Sachs Group Inc.
“As such, we expect the central bank to maintain its dovish stance for an extended period,” Ramos wrote in a client brief published ahead of the central bank’s decision.
Peru last changed its interest rate in April 2020, when it lowered it by a full percentage point, giving the Andean nation the lowest benchmark rate among the major Latin American economies.
The uncertainty surrounding the first round on Sunday of the presidential elections has also brought volatility to the Peruvian currency and bond markets, which could complicate the central bank’s job. There are 18 candidates in the race, none of them above 15%, making the June runoff almost inevitable.
Leading most of the polls is former congressman Yonhy Lescano, who wants the state to play a more active role in distributing the country’s mineral wealth and lowering consumer interest rates. Another contender, former congresswoman Veronika Mendoza, has talked about imposing a wealth tax and rewriting the constitution.
In contrast, when Hernando de Soto, an economist and former head of the central bank, rose to second place during a recent survey, bond and currency markets rallied at the prospect of having a pro-market candidate at the forefront of the economy.
Despite the uncertainty, the International Monetary Fund estimates that Peru could grow 8.5% this year as restrictions are relaxed and the vaccination campaign spreads.
Original Note: Peru Holds Key Rate Near Zero, Looking Past Inflation Spike
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