Peru Cuts Rates to 5.25% in Expectation of Stronger Economic Growth

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The Central Bank of Peru reduced its interest rate to its lowest level since 2022.

Peru’s central bankers cut the interest rate by 25 base points during their September meeting. This leaves the benchmark rate for the country at 5.25%, among the lowest in all of Latin America.

The cut comes as Peru experiences significant economic growth, primarily driven by a surge in natural gas production.

The decision to lower rates reflects a broader economic strategy aimed at maintaining stability in the face of falling inflation. Headline inflation in Peru dropped to 2% in August, comfortably within the Central Bank’s target range of 1%-3%.

However, core inflation, which excludes more volatile food and energy prices, remains slightly elevated at just above 3%.

Peru’s Central Bank expects headline inflation to stay within its target range, while core inflation is forecasted to gradually decline.

Despite these promising figures, concerns about a potential currency devaluation have surfaced, particularly in light of the US Federal Reserve’s recent rate cut of 50 basis points.

Central Bank President Julio Velarde reassured markets, stating that Peru’s economy is resilient enough to manage a currency that could fall up to 1 percentage point below the US Fed rate without destabilizing the economy.

The central bank’s decision is also informed by Peru’s recent recovery from last year’s recession. The country’s GDP grew by 4.5%, in July, marking the fourth consecutive month of economic expansion.

Peru’s recovery has been buoyed by the hydrocarbon sector, which saw 21.6% growth—its highest rate since May 2022—thanks to increased extraction of natural gas and natural gas liquids.

The Peruvian economy still faces risks from the high volatility of global commodity markets, however, which could impact the country’s key export sectors.

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