Peru Holds Key Rate as Protests Fade, Inflation Unexpectedly Slows – BNN Bloomberg

(Bloomberg) — Peru left borrowing costs unchanged for a second straight month as the inflation outlook brightens, economic growth cools, and violent anti-government protests wind down.

The central bank left its benchmark interest rate unchanged for a second straight meeting, at 7.75%. In the 18 months through January, the bank raised borrowing costs at every meeting, in its steepest-ever series of monetary tightening.  

All 11 analysts surveyed by Bloomberg correctly forecast the decision. 

Brazil and Chile have also halted interest rate rises, while Mexico and Colombia have continued to hike at recent central bank meetings. Economists now expect several major economies in the region to start cutting borrowing costs later this year as economic growth slows and inflation slows toward its target.   

What Bloomberg Economics Says

“We believe policymakers may have to hike interest rates again later this year. Thursday’s pause increases the probability that the BCRP falls behind the curve and has to keep rates higher for longer. That may undermine the central bank’s credibility and put weakening pressure on the currency.”

— Felipe Hernandez, Latin America economist

— Click here for the full report

Some analysts forecast that Peru will be one of the first major economies in Latin America to start monetary easing, due to the damage the protests wreaked on economic output. 

“We expect a downward trend in annual inflation from March, with its return to the target range in the fourth quarter of this year,” the bank said in its statement. 

A moderation in global food and energy costs, the reversal of supply shocks in the agricultural sector and a lowering of inflation expectations will cause consumer price rises to slow, the bank said. 

Policymakers added that Thursday’s decision doesn’t necessarily mean that the series of interest rate rises is over, and that this will depend on inflation and its causes, including the impact of the recent protests. 

Significant Damage

Peru has been mired by protests almost every day since President Dina Boluarte took office in December. At its peak in January, the road blockades were causing significant damage to Peru’s mining, tourism and agribusiness industries, while also stoking inflation.  

Most of those road blockades have now been lifted as fatigued demonstrators gave up without their demands having been met. 

  • Read more: Peru’s Economic Outlook Brightens as Fatigued Protesters Go Home

That’s allowing the economy to restart, and is easing pressure on the government. Protests are now mostly confined to the Andean region of Puno. 

Protesters are demanding the resignation of Boluarte and new general elections. But congress has not heeded the call to bring forward elections and Boluarte has refused to quit. 

Annual consumer price rises unexpectedly slowed to 8.65% last month. The central bank has predicted that inflation will slow gradually to reach its target band of 1% to 3% by the fourth quarter. 

Economic activity expanded 0.9% in December from a year earlier, its weakest pace in nearly two years. 

(Adds comments from bank’s statement from sixth paragraph.)

©2023 Bloomberg L.P.

Source link