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Peru: The BCRP remained on hold at 2.25%. The likehood of new rate cuts has decreased recently


January 10, 2020 ( Newswire) The Central Bank of Peru (BCRP) held its reference rate unchanged at 2.25% in the first meeting of the year, in line with the market consensus.

In the official statement, the BCRP highlighted once again the downside risks for inflation. Specifically, even though that the Board noted that inflation is expected to stand around 2% in the foreseeable future, there is a moderate downside bias due to domestic demand potentially growing below current expectations. It is important to highlight that inflation expectations stood at 2.2% in Dec-19. In addition, the statement noted that primary sectors and public investment from the general government had a negative performance during 2019, which was partially offset by the dynamics observed in non primary sectors. Moreover, the Board noted that business expectations remained stable in December, while economic activity indicators are signaling a gradual closing of the negative output gap. Also, the statement noted that the impact of recent geopolitical events on international prices remains uncertain.

As in previous months, in the statement it was that "The BCRP Board pays close attention to new information on inflation and its determinants in assessing future changes in the monetary policy stance".

The likelihood of an additional rate cut from the Central Bank has decreased recently, as the real monetary policy rate already stands close to zero and the expectations of higher fiscal stimulus have increased (the government issued 5 urgency decrees which would bolster public investment projects during 2020). However, the Central Bank could lower its policy rate to 2.00% only if the following conditions are met: i) inflation expectations descend towards 2% (Dec-19: 2.2%), and ii) public investment does not pick up and economic growth disappoints. It is important to note that BCRP Certificate Deposits due in 6, 12 and 18 months are being issued at 2.00%, 2.03% and 2.16%, respectively.

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