Peru’s Central Bank Holds Interest Rates Steady Amid Economic Growth and Core Inflation Concerns

Peru’s central bank decided to keep its benchmark interest rate unchanged for the second consecutive month, focusing on persistent core inflation despite the country’s fastest economic growth in over two years. On Thursday, the central bank maintained the rate at 5.75%, aligning with the predictions of 10 out of 13 analysts surveyed by Bloomberg. The remaining three analysts had anticipated a rate cut to 5.5%.

In its statement, the central bank emphasized its vigilance regarding new data on inflation and its underlying factors, such as core inflation, inflation expectations, and economic activity, to determine any future adjustments to its monetary policy stance.

Although Peru’s headline inflation has remained within its target range since April, policymakers are particularly concerned about the core inflation measure, which excludes volatile food and energy prices to reflect underlying trends. Core inflation remained stable at 3.1% in June, while overall inflation was 2.29%. Peru’s target for annual headline inflation is 2%, with a tolerance of plus or minus one percentage point.

In April, Peru’s economic activity saw a significant year-over-year increase of 5.3%, surpassing all forecasts. This recovery has reduced the pressure on the central bank from the government to lower rates more rapidly. As a major copper producer, Peru’s economy could benefit further from this year’s rise in copper prices. Additionally, the resumption of construction at Southern Copper’s Tia Maria project, which has been delayed since 2019, is expected to further boost economic activity.

Peru currently has the lowest interest rate and inflation among major Latin American economies. The key rate is only marginally higher than that of the US Federal Reserve, often considered a natural lower bound for emerging market economies. Nonetheless, central bank chief Julio Velarde indicated in May that Peru’s interest rate could potentially fall to as much as one percentage point below the Fed’s rate.

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