The monetary authority cited the persistence of the inflation underlying 12-month rate – which does not consider food and energy prices – at 3.1%, above its target range (between 1% and 3% annually) as one of the factors that influenced its decision to extend the pause in the cycle of reductions of its reference rate that began in September 2023.
Furthermore, the issuing institute launched a guide in which it considers this price component. “The Board is particularly attentive to new information regarding inflation and its determinants, including the evolution of underlying inflation, inflation expectations and economic activity, in order to consider, if necessary, additional modifications to the position of the monetary policy”.
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Until when will the BCRP freeze its interest rate?
For Jorge Chavez, president of Maximixcore inflation is one of the main concerns of the BCRP today. The economist even states that as long as good data on this last indicator does not emerge, the monetary authority would tend to keep its guiding rate unchanged at least until September.
This month will be transcendental for the course of the BCRP interest rate, since its American counterpart (the Federal Reserve or Fed) might then define a first reduction in its own rate (currently at 5.50%).
The path taken by the Fed rate will be essential for that of the BCRP, due to its impact on the cost of financing at an international level and because the reduction of the gap between both rates (the US and the local one) can cause distortions in the domestic financial market, through upward pressures on the dollarsaid the former president of the issuing institute.
BCRP rate remains on hold
A source from the financial system expressed the same position: “The Central Bank (Reserve) will never say that as long as the Fed does not lower its rate, it will not lower its own, because it defends its independence from the US monetary policy. But this gap between the rates is an important factor because, if it is very large, it can encourage an abrupt capital outflow that would boost the exchange rate (rise of the dollar).”.
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Why is the dollar falling but the BCRP keeps its interest rate frozen?
But for now, despite the fact that the dollar is weakening in Peru and international markets, precisely because the probability of the Fed reducing its guide rate starting in September is increasing, in light of recent data showing that inflation in that country is easing and its economy is losing strength, the BCRP remains cautious and does not risk a new reduction in its interest rate.
Chávez maintains that the BCR is looking askance at the decline of the dollar – which in July fell from S/ 3.844 to S/ 3.76 – because it would only be a circumstantial and temporary bias – linked to the greater demand for soles for expenses of national holidays – which does not give it a wide margin to cut its reference rate.
Chávez then addressed the consequences that the prolongation of the pause in the downward phase of the BCR rate might have on the financial system.
He argued that, in reality, bank loan interest rates today move more due to the greater perception of risk that debtors have, given the advance of default and crises such as the one that arose with the intervention of the Sullana Box.
Related notes on the dollar:
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BCRP Maintains Interest Rate Freeze Amid Inflation Concerns
The Peruvian Central Reserve Bank (BCRP) has decided to maintain its reference rate at its current level, continuing a pause in the cycle of reductions that began in September 2023. This decision, according to the BCRP, is driven by the persistence of underlying inflation, which excludes food and energy prices, at 3.1%. This figure remains above the BCRP’s target range of 1% to 3% annually.
The BCRP’s statement emphasizes its focus on monitoring key indicators, including underlying inflation, inflation expectations, and economic activity. The institution remains open to adjusting its monetary policy stance if necessary. The BCRP’s decision aligns with its commitment to maintaining price stability and supporting a healthy economic environment.
Core Inflation and the BCRP’s Outlook
Jorge Chavez, President of Maximix, highlights core inflation as a primary concern for the BCRP. He believes that until the BCRP sees favorable data regarding core inflation, the institution will likely keep its reference rate unchanged at least until September.
This month will be crucial for the BCRP’s interest rate trajectory, as the US Federal Reserve (Fed) may announce a first reduction in its own rate, currently standing at 5.50%. The Fed’s actions will have a significant impact on the BCRP’s decision-making, due to the influence of US monetary policy on international financing costs. A narrowing of the interest rate gap between the US and Peru might lead to distortions in the domestic financial market, potentially pushing the dollar exchange rate upward.
The Dollar’s Weakening and the BCRP’s Stance
Despite the recent weakening of the dollar in Peru and international markets, primarily driven by increasing expectations of a Fed rate reduction, the BCRP remains cautious and hesitant to lower its interest rate.
Chávez attributes the dollar’s decline to a temporary and circumstantial bias, mainly linked to increased demand for Peruvian soles during national holidays. He argues that this temporary trend does not provide sufficient grounds for the BCRP to cut its reference rate.
Consequences of Maintaining the Current Interest Rate
Chávez addresses the potential consequences of prolonging the pause in the BCRP’s rate reduction cycle. He observes that bank loan interest rates are currently more influenced by the heightened perception of risk among borrowers, fueled by rising default rates and recent crises like the intervention of the Sullana Savings Bank.
The BCRP’s cautious approach to lowering its interest rate, despite the dollar’s weakening and increasing likelihood of a Fed rate reduction, reflects the institution’s focus on maintaining price stability and ensuring a balanced economic environment. The outlook for the Peruvian economy and the BCRP’s monetary policy will continue to be shaped by ongoing developments in inflation, the Fed’s interest rate decisions, and the overall global economic landscape.
Related Notes:
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BCRP’s Decision: Key Considerations
The BCRP’s decision to maintain a pause in its interest rate reduction cycle is rooted in several key considerations:
- Persistent Underlying Inflation: The underlying inflation rate, excluding food and energy prices, remains above the BCRP’s target range, signaling ongoing inflationary pressures.
- Focus on Inflation Expectations: The BCRP is monitoring inflation expectations closely, recognizing their impact on future price stability.
- International Monetary Policy: The BCRP is considering the impact of the Fed’s potential interest rate reductions on domestic financial markets and the exchange rate.
- Risk Perception: Heightened risk aversion among borrowers, stemming from rising default rates and recent financial crises, influences lending rates and the overall credit market.
Key Takeaways
- The BCRP remains committed to maintaining price stability and supporting a healthy economic environment.
- Core inflation remains a primary concern for the BCRP, and the institution’s decision-making will be influenced by data related to this indicator.
- The Fed’s potential interest rate reductions and the impact on the dollar exchange rate are important considerations for the BCRP’s monetary policy stance.
- The BCRP’s cautious approach to rate reductions reflects a balance between inflation concerns, exchange rate stability, and the need to support a sustainable economic recovery.
