Peru's cenbank holds rate, but will inflation meet its 2017 target?

Friday, October 14, 2016

Peru's central bank kept its benchmark rate unchanged at 4.25% on Thursday, as was widely expected.

Justifying its decision in a statement, the central bank underlined the decreasing impact of food prices, public service rates and the exchange rate on inflation during September, and the economy growing at a rate "close to its potential."

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The bank added that it expected inflation to converge to 2.0%, the midway point of its target range, by 2017

Cumulative inflation for the last 12 month reached 3.13% in September, up from 2.94% the previous month, while cumulative core inflation, which excludes food and energy prices, rose to 3.01% from 2.96%.

The reduction in inflation since the beginning of the year - annual inflation reached 4.6% in January - is due largely to the fading effect of some temporary shocks, including the depreciation of the sol and rate hikes, which drove up inflation last year, according to UK-based economic research firm Capital Economics, who added that as the economy continues growing strongly "underlying price pressures are unlikely to ease much further over the coming months."

Considering the still existing inflation pressures and an economic plan to stimulate the economy outside the booming mining sector that is likely to be approved in the congress, "we expect core inflation to start rising again soon, pushing the headline rate well above the top of the central bank's 1-3% target range next year," added Capital Economics.

"We expect a pick-up in inflation next year to trigger more rate hikes than the consensus expects."

(Pictured: Julio Velarde, president of Peru's central bank)