Peru Forecast to Raise Key Interest Rate Amid Violent Unrest

The central bank will lift its policy rate 0.25 percentage point to 7.75%, according to 10 of 11 analysts surveyed by Bloomberg

Peru Central Bank Expected To Deliver Rate Increase.
By Marcelo Rochabrun
January 12, 2023 | 11:05 AM

Bloomberg — Peru is expected to extend its steepest-ever phase of interest rate hikes Thursday, as above-target inflation is aggravated by mass unrest and road blockades.

The central bank will lift its policy rate 0.25 percentage point to 7.75%, according to 10 of 11 analysts surveyed by Bloomberg, while one forecasts no change.

A hike would be the 18th consecutive increase since the bank started tightening policy as the economy rebounded from the pandemic in 2021. The decision is scheduled for 6 p.m. local time.

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Central bank chief Julio Velarde is trying to curb Peru’s worst inflation spike since the 1990s. But his task is being complicated by mass anti-government protests that have blocked key highways and left at least 40 dead.

Demonstrators are demanding President Dina Boluarte’s resignation, new elections and the release of former President Pedro Castillo from police custody. Boluarte took office last month when Castillo was impeached after attempting to dissolve congress.

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“Protests have caused disruptions, road blockades, that may affect prices, food most likely,” said Felipe Hernandez, Latin America economist at Bloomberg Economics. “The impact from blockades is transitory, but the problem for the central bank is that at current levels, well above target, they can’t ignore transitory shocks.”

The bank is likely to leave the door open for further rate increases, Hernandez added. Brazil and Chile have already halted their monetary tightening phase as inflationary pressures ease, while Peru, Colombia and Mexico are continuing to raise borrowing costs.

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Copper Rich

Some 60 roads, especially in Peru’s copper-rich south, were blocked as of Wednesday according to the nation’s highway authority, disrupting food supplies to markets in coastal cities and copper transportation to ports.

Congress confirmed Boluarte’s cabinet on Tuesday night, potentially reducing the instability.

Peru’s economy will grow 2.3% this year, according to analysts surveyed by Bloomberg, down from an estimated 2.8% in 2022.

Annual inflation was little changed at 8.46% in December, surprising analysts who had expected it to cool. Consumer prices rises have slowed slightly from a 25-year high in June, but remain more than four times the 2% midpoint of the central bank’s target range.

--With assistance from Rafael Gayol

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