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Peru Raises Key Rate to Curb Fastest Inflation in 12 Years

(Bloomberg) — Peru tightened monetary policy for a third straight month after inflation surged to its highest rate in 12 years and political volatility roiled the currency.

The central bank lifted its benchmark rate half a percentage point, to 1.5%, matching the median forecast of economists surveyed by Bloomberg. It was the third consecutive rate hike by the bank led by Julio Velarde.

Peru and every other major inflation-targeting central bank in Latin America are withdrawing stimulus as consumer prices rise faster than their target in one country after another. As government’s eased controls they’d imposed to curb the spread of Covid-19, pent-up demand pushed prices higher, while rising global food and energy costs also hurt consumers.

PERU REACT: Central Bank Likely to Slow Pace After Latest Hike

Peru’s central bank is grappling with those same global trends, as well as with domestic volatility. The nation’s stocks, bonds and currency all rallied Thursday, a day after President Pedro Castillo replaced a prime minister accused of sympathizing with terrorists with a more conventional choice, in a bid to improve his administration’s relations with congress.

Even so, the sol is still down 11% since Castillo unexpectedly won the first round of Peru’s presidential election in April.

Read More: Peru Assets Rally as Investors Cheer Moderate Cabinet Picks

“Most leading indicators and economic expectations have improved slightly in September, but they remain in pessimistic territory,” the bank said in a statement accompanying the announcement.

The normalization process “will continue throughout the next year and perhaps a little further,” former Peru Finance Minister Alonso Segura said in an interview. “It is not that every month the central bank will hike rates, the bank will calibrate the expectations.”

Deepest Slump

After the pandemic hit, Peru’s central bank slashed its key interest rate to 0.25%, the lowest in Latin America, and kept it at that level until August. In 2020, the nation suffered the deepest slump among major economies in the region, but is now rebounding strongly. Gross domestic product is set to grow 11.9% this year, according to a forecast from the central bank.

The annual inflation rate jumped to 5.2% last month, its fastest pace since 2009. The central bank targets inflation of 2%, plus or minus one percentage point.

“It’s projected that the inflation will return to the target range within the next 12 months,” the bank said in Thursday’s statement, repeating last month’s stance.

Castillo changed the prime minister, Guido Bellido, on Wednesday, saying this would improve governability. Bellido was replaced by former head of congress Mirtha Vasquez, following weeks of clashes between Castillo’s administration and lawmakers.

Today’s decision was forecast by four of seven analysts surveyed by Bloomberg; two expected a smaller increase, of a quarter-percentage point, and one had predicted no change.

(Updates with central bank comment in sixth, analyst comment in seventh paragraph)

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