The government of Peru decided to keep interest rates at their highest level in 22 years to ensure that inflation moves forcefully in the desired direction.
On Thursday, the central bank did not change its benchmark interest rate from its previous level of 7.75%, as had been predicted by all 11 analysts surveyed by Bloomberg.
In addition to Colombia’s central bank, central banks in Brazil, Chile, and Mexico have ended monetary tightening cycles. This month, the Colombian central bank may terminate its most aggressive rate-hiking cycle ever. Even though it is anticipated that economic growth will pick up again this year, Peru’s core inflation remains high and strong inflation expectations constrain the country’s ability to reduce its interest rates.
Inflation will be “close” to the target range by the end of the year, according to the bank, which is an adjustment from their prediction one month ago that it would have dropped to 3% by that date.
In May, consumer prices increased by 7.9% as compared to the same month one year prior, which was above the intended range of 2%, plus or minus one percentage point.
The bank unexpectedly paused its steepest-ever series of interest rate hikes in February, over concern that massive anti-government protests would hammer the economy. Those protests are now over and initially led to a surge in inflation, especially food prices, that’s begun to abate.
Peru’s Finance Ministry has said the biggest risk to the economy this year remains a crippling El Nino weather pattern, which would bring renewed rains and flooding to Peru’s northern region. The area is an agricultural hub and disruptions could lead to higher food prices.