On April 6, the board of directors of Peru’s central bank, El Banco Central de Reserva del Peru (BCRP), chose to maintain its current interest rate at 4.25 percent. The BCRP has not changed interest rates since February 2016.
In their official informative note, the board provided four reasons for their decision.
First, an uptick in inflation from supply shocks caused by last month’s heavy rains and floods. Inflation in March was much higher than expected: 1.3 percent. This was due to high food and energy prices caused by the heavy rains and severe flooding.
Second, inflation over the next year is expected to be near the upper limit of the BCRP’s target of between 1.0 and 3.0 percent. For reference, the interannual inflation rate was 3.25 percent in February and 3.97 in March.
Third, a deceleration in economic growth during the first quarter of 2017. However, the BCRP expects “that economic activity in the next quarters will gradually show a greater dynamism by increasing public spending and higher export prices.”*
Fourth, while the BCRP has a positive outlook on the global economy, it acknowledges that there is a level of uncertainty in other developing economies.
For many countries in Latin America and the Caribbean, the decision to raise, lower, or maintain interest rates is based on the need to combat inflation or promote growth.
Before the April 6 announcement, some thought that the BCRP would cut interest rates to promote growth.
Since the December Odebrecht revelations, forecasts for economic growth in Peru have been cut from more than 4.0 percent to between 3.0 and 3.5 percent. Pedro Tuesta, an analyst with 4cast, believes that economic growth may be as low as 2.8 percent if strong El Niño weather conditions continue into April.
The slower than expected economic growth has taken a toll on President Pedro Pablo Kuczynski’s approval ratings. Elected on a pro-growth platform, the Odebrecht scandal has tied up many construction projects throughout Peru. Given the damage that has already been caused by the recent floods, including more than 200 bridges and 2,000 kilometers of highway destroyed, the country will need to invest heavily in infrastructure repair and construction.
While inflation in Peru is relatively tame compared to Argentina or Venezuela, those two countries and Peru’s own past experience demonstrate the need to keep inflation in check. For now, it appears that the board of directors at the BCRP view inflation as more of a threat to the Peruvian economy than lackluster economic growth.
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*All translations are the author’s