September 13, 2011

On September 9, the Central Reserve Bank of Peru left its reference rate unchanged at 4.25% as had been done at previous meetings in June, July and August.  However, a new statement on the Bank’s web site and prior remarks by the BCRP governor have prepared analysts to expect easing moves, a rate cut or lower reserve requirements or both.  To wit,

This decision takes into account the slowdown observed in economic activity and the intensification of international financial risks. Should these trends continue, the Central Bank will change its monetary policy stance.

The rate bias had been toward tightening but now lies in an easing direction.  Officials are predisposed to shift gears in spite of upwardly creeping inflation, which is now around a two-year high of 3.35%, and Peruvian growth that is projected to be at or slightly above 6.0% this year and next. 

If and when a rate reduction is decided, the cumulative downswing is unlikely to be limited to just 25 basis points.  Peru’s reference rate, like Brazil’s, has undergone wide swings in recent years, dropping from 6.5% to 1.25% between August 2008 and February 2009 and subsequently climbing by 300 bps in ten increments administered over twelve months from May 2010 through May 2011. 

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



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