BCRP would resume cuts in its reference rate today

The Board of Directors of the Central Reserve Bank of Peru (BCRP) will decide today if they continue to cut the interest rate or if they keep it at 7.25%. Although, according to the consensus of specialized entities, they would subtract 25 basis points, placing it again at 7.0%: a ratio not seen since October 2022.

In recent weeks, groups such as Lima Chamber of Commerce (CCL), Scotiabank, BBVA Research and the BCP Economic Studies Area argue that the BCRP has enough room to make its monetary policy more flexible, since inflation loses aggressiveness.

Julio Velarde: Inflation will fall further

Interannual inflation in Metropolitan Lima fell from 5.0% to 4.3% in October and reached its lowest rate since July 2021. The event was explained by the reversal of prices in foods such as lemon, onion and eggs: all three contributed with a decrease of 0.66 percentage points.

Although inflation is approaching two and a half years outside the BCRP’s target range – situated between 1% and 3% – the president of the BCRP, Julio Velardeassures that this will continue to decline and will even close 2023 below the 3.8% projected in its latest Inflation Report.

“We expect 0.2% to 0.25% monthly in November and December. The year, apparently, we ended at 3.4% or 3.5%. I don’t see that as stagflation. The inflation “It continues to decline,” commented the banker in an interview with the Chilean media DFSUD.

In addition, he highlighted that Peruvian core inflation is at 3.3% —this does not consider components with volatile prices such as food and energy—, it is lower than in Latin America, the United States and the Eurozone; and the current would end between 2.9% and 3%.

Invitation to further reduce the rate

The BCP foresees that the BCRP reference rate will close December at 6.75%, but they consider that in the first quarter of 2024 they would “pause” to evaluate the impacts of the El Niño phenomenon on the Peruvian market. Meanwhile, Scotiabank believes that prices will only correct in the second quarter of next year after the temporary climate damage.

In a recent dialogue with La República, the Minister of Economy and Finance, Alex Contreras, urged the BCRP to continue lowering its rates quickly since the productive reactivation depends on it; and in contrast, the PUCP professor and former head of the MEF, Kurt Burneo, asked the BCRP to recognize that its monetary policies are affecting the growth possibilities of the Peruvian GDP.

“There is an impact on investment consumption and economic activity. I do not describe what the BCRP did as good or bad, but it is clear that the devaluation of the economy has to do with these BCRP policies,” Burneo mentioned in an interview with this newspaper.

For his part, Julio Velarde assured DFSUD that he “does not give importance” to these questions, and argued that no central bank raises rates to affect the economy.

More impacts apart from El Niño

Velarde emphasized that “we are a riskier country than the United States,” considering that the neutrality rate in the North American giant is 0.5% and some federal central banks estimate it to be higher. “If the US neutral rate is higher, it will also affect the rest of the world. If the exchange rate remains stable against the dollar, a neutral US rate will likely result in a higher rate for us as well. It’s hard to tell now,” she added.

In addition, Velarde reiterated his rejection of the legislative proposal that provides for the release of advance funds from the AFPwhich he called “absurd.”

Reactions

Julio Velarde, president of the BCRP

“No central banker is raising rates to hurt the economy. It is an instrument that is crude to control inflation, and not controlling it ends up being more costly for economic activity.”

Kurt Burneo, former Minister of Economy and Finance

“There is an impact on investment consumption and economic activity. It does not qualify as good or bad, but the devaluation of the economy has to do with these BCRP policies.”