Peruvian Interest Rate Hike

January 7, 2011

Peru has had one of the fastest-growing economies.  So while a sixth rate increase announced late yesterday by the Central Reserve Bank of Peru surprised analysts in its timing, the move made considerable sense.  The reference interest rate is now 3.25%, 200 basis points greater than its cyclical low prior to an initial rate hike in May 2010.  This was the sixth increase in eight months, the last being a 50-bp advance in September.  A statement released by the central bank stressed the preventive nature of the latest rate increase, noting that inflation of 2.1% in December remains low and near the center of the 1-3% target range but also observing that strong growth in domestic demand and world food and energy prices could lift expected Peruvian inflation.  It is this risk that officials aim to avoid.  Peruvian GDP likely expanded around 9% last year or ten times faster than in 2009.  Record copper prices help.  Analysts had not anticipated a sixth rate rise just yet because such could put additional upward pressure on the sol.  Peru intervened last year to mitigate the extent of exchange rate appreciation.  The next central bank Board meeting is scheduled for February 10.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.



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