Peru’s Key Interest Rate hits 7%

Peru increased interest rates for the fifteenth consecutive month in an effort to rein in inflation and reduce the danger of capital flight as the US Federal Reserve removes stimulus. In accordance with predictions, the central bank increased its benchmark rate by a quarter of a percentage point to a two-decade high of 7 percent. That is a marked increase from 0.25 percent in August 2021.

“The board is especially sensitive to new information regarding inflation and its determinants, including the behaviour of inflation expectations and economic activity, to consider additional modifications in the monetary stance,” the bank said in its statement. The bank further stated that it would take the necessary steps to return inflation to its desired level.

This year, all the main central banks in Latin America that aim to reduce inflation have tightened monetary policy as a result of supply shortages, currency weakness, and Russia’s invasion of Ukraine. Felipe Hernandez, a Latin American economist, claims that policymakers in Peru and other countries in the area are attempting to avert a selloff in their currencies as a result of rising interest rates in the US.

Analysts disagree on whether today’s hike will be the final one before the economy cools and monetary policy tightens. Because Peru’s economy is not as overheated as its Andean neighbours Chile and Colombia, interest rates there have increased more slowly, according to Hernandez.

Julio Velarde, president of the central bank, stated last week that policymakers most likely won’t need to boost borrowing prices significantly more. According to analysts surveyed in a recently released report, Peru’s GDP would grow by 2.8 percent this year, down from a growth rate of over 13 percent in 2021. Last month, annual inflation increased to 8.5 percent, more than four times the central bank’s goal range of 2 to 2 percent.