Peru

In a “preventative” measure to tackle inflation and inflation expectations, Peru’s central bank has raised rates 25 basis points for the third consecutive month. The reference interest rate now stands at 3.75 per cent.

The move was widely expected given rising – but still moderate – inflation pressures. Annual inflation to February was 2.23 per cent. Month-on-month the increase was 0.38, just below January’s monthly increase of 0.39, which was the highest in two years. The Bank’s target is to keep inflation below 3 per cent. The central bank has indicated that monetary policy remains accommodative at 3.75 per cent, and that 4.5 per cent would be more “neutral”, suggesting further rises lie ahead. There might be a pause at the next meeting, however, given moderate and tempering inflation.

Colombia raised rates 25bp late on Friday, the first rise since the financial crisis. The move, which took markets by surprise, takes the Bank’s key intervention rate to 3.25 per cent, compared with 10 per cent before the cuts began. Colombia also said it would continue its $20m-a-day dollar purchasing programme, through which it is trying to dampen appreciation of the Colombian peso.

Peru, meanwhile, yesterday raised its reserve requirement ratio for the second time in two months. The quarter-point rise applies to sol- and dollar- denominated bank reserves and is intended “to keep inflation expectations anchored within the 1 percent to 3 percent target range,” the bank said in a statement, according to Bloomberg. Peru also raised rates in January and February, taking the key rate from 3 to 3.5 per cent since the start of the year.

Peru’s central bank caught economists by surprise on Thursday night when it raised its benchmark lending rate from 3 to 3.25 per cent on inflation concerns arising from “international” price rises.

Amid strong inflows of “hot money” that have pushed the Nuevo Sol to a two-year high of about 2.8 per dollar, the seven-member bank board had been holding rates at 3 per cent for the past three months.

The bank said the increase of 25 basis points was now warranted as “a preventive measure” against “the dynamism of domestic demand in an environment of international increases in food and energy prices”. While inflation stood at 2.08 per cent this month, well within the Bank’s target range of 1 per cent to 3 per cent, Peruvians are understandably touchy on the subject, having lived through hyperinflation in the mid-80s.

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‘Unsustainable growth in credit’ has prompted the Peruvian central bank to raise its reserve requirements. Banks will need to hold funds equivalent to 75 per cent of borrowings abroad maturing in less than two years, up from 65 per cent, reports Bloomberg.

The economy shows some signs of overheating, with rising inflation and a strengthening currency that consistent recent forex interventions have slowed but not reversed (see chart; source). The Reserve bank has increased its reference rate steadily during 2010, the most recent rise taking the rate to 3 per cent.

Peru’s central bank has raised its benchmark rate a more-than-expected 50bp to 2.5 per cent, to counter rising inflationary pressures. The economy grew 9.2 per cent in the year to May and is forecast to rise a “spectacular” 10 per cent in the year to June, central bank chief Julio Velarde said a couple of weeks ago. Peru was the second South American country to begin raising rates, after Brazil. Since then, Chile has also increased rates.

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Simone Baribeau

Finally, some good news for sovereign debt. As Greece and Mexico suffer credit ratings downgrades, Moody’s upgraded Peru’s debt to investment grade. Moody’s upgraded Peru’s foreign-currency government bond rating to Baa3 from Ba1, praising the country for its increased resilience to shocks and reduced credit risks. Read more