Peru. The Central Bank keeps the policy rate on hold

Summary

The Central Bank decided to keep in October its policy rate at 3,50%, in line with market consensus. The statement accompanying the decision omitted on this occasion that output growth is weaker than expected. On the contrary, it added that there are some signs of economic activity recovery in September and that the decision to keep the policy interest rate at its current level considered the increased volatility in financial and foreign exchange markets. For us at BBVA, this decision was somewhat surprising. We perceived that output (currently weak and expected to improve in the coming months at a slower pace than anticipated a few weeks ago) and prices (contained inflationary pressures) considerations were more important than foreign exchange ones and therefore foresaw in October a policy rate cut, although in a limited way (by 25bp, to 3,25%). This ultimately did not happen. The Central Bank seems to consider that it is prudent in an environment of increased volatility in financial and foreign exchange markets to maintain a monetary policy stance which does not add to local currency weakness, as suggested in the press release, and hopes that the recovery in the coming months will show the expected intensity.

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