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Peru maintains rate at 0.25% prior to second round of elections

(Bloomberg) – Peru kept its borrowing costs at an all-time low, while its economic recovery falters, while bonds and currencies fluctuate stormy ahead of next month’s presidential runoff.

The central bank maintained its reference rate at 0.25%, the lowest among the main Latin American economies, fulfilling its commitment to continue supporting the economy devastated by the pandemic for a long time. The decision stayed in line with the expectations of seven economists surveyed by Bloomberg.

Days after the bank meeting in April, the nation’s assets receded when Pedro Castillo, a little-known schoolmaster from a Marxist party, unexpectedly won first place in the first round of the elections. Bonds and the sun extended their losses when polls showed Castillo had a 20 percentage point lead over former congresswoman Keiko Fujimori, later rebounding when the gap narrowed to the margin of error.

The 11% drop in the economy last year was deeper than the contractions suffered by Colombia, Chile, Brazil and Mexico. The situation was exacerbated by one of the strictest lockdowns in the region and political instability that has given the country three different presidents since November.

The economic activity index, a proxy for gross domestic product, suggests that the post-pandemic economic recovery came to a halt in the first two months of the year, amid a second spike in infections.

The recent rise in the price of copper, Peru’s biggest export, illuminates the outlook. Even so, the economy will not return to its pre-pandemic production level until next year, according to the International Monetary Fund.

Restless investors

Last month, inflation unexpectedly slowed, while food and beverage prices fell. Peru last changed its interest rate in April 2020, when it lowered it by a full percentage point.

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What Bloomberg Economics Says

“In Peru, inflation remains close to target, activity is weak and the recovery lost momentum. The uncertainty about the outlook remains high and the risks are to the downside. “

– Felipe Hernández, Latin American economist

Castillo, 51, upset investors with his proposals to increase state control over strategic industries and redistribute wealth. The candidate has lately tried to distance himself from some of the positions defended by his party, Peru Libre, which praises the policies of former Venezuelan socialist leader Hugo Chávez.

A poll published by RPP Noticias this week found that Castillo has 34.2% of the intention to vote compared to 32% for Fujimori.

Original Note: Peru Holds Latin America’s Lowest Key Rate Ahead of Runoff (1)

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