Peru’s central bank to hike rate as inflation hits 25-year high

Bloomberg

Peru’s central bank is expected to raise its key interest rate by half a percentage point on Thursday as the fastest inflation in 25 years fuels social tension in the Andean country.
Policy makers will lift the benchmark rate to 6%, the highest since 2009, according to
all economists surveyed by Bloomberg. It will be the 12th straight hike in a cycle that’s already added 525 basis points to borrowing costs since August.
Policy makers are looking to cool inflation while a slowdown affects key economic sectors. Surging cost of living has prompted labour unions to go on strike in recent weeks, forcing the government to pledge more resources to help the poor. Still, central bank President Julio Velarde has thus far ruled out aggressive hikes on a bet that price forecasts will improve.
Peru is tightening monetary policy as Latin American nations also battle above-target increases in consumer prices. Mexico delivered a record interest rate hike last month, while Chile will likely raise borrowing costs for the ninth straight time on July 13.
The decision will be published on the bank’s website in Lima together with a statement from its board.
Investors will seek confirmation of the bank’s view that annual inflation will start to ease from July. Consumer prices rise 8.81% in June from a year prior, well above the 2% target, according to the national statistics agency.
“The expectation would be that in July, August, year-on-year inflation will begin to fall due to a base effect from last year but also due to the reduction in commodity prices,” central bank board member Diego Macera said in a June interview with Bloomberg News.
Many analysts believe the tightening cycle is in its final stage. Scotiabank sees policy makers pausing at 6% after Thursday’s hike, while Banco de Credito del Peru expects them to lift rates to 6.50% in the third quarter and then stop.
The bank’s board is meeting as inflation sparks social tensions and prompts government action.
In June, truckers went on strike over rising fuel costs.
The Transportation Ministry is now backing tax rebates for cargo and passenger carriers. Separately, the Agriculture Ministry proposed the creation of a fund with 5 billion soles ($1.3 billion) to help farmers facing fertilizer shortages.
Peru’s economic outlook is also being clouded by an ongoing political crisis, as the opposition-led congress takes steps that can lead to the ouster of President Pedro Castillo and Vice President Dina Boluarte.
In June, the central bank cut its estimate for 2022 gross domestic product growth to 3.1% from 3.4% previously on weaker mining activity.