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Peru Holds Key Interest Rate Near Zero, But Changes Guidance

Updated on
  • Bank drops commitment to keep rate low for ‘prolonged period’
  • Central bank pledged to provide stimulus to weakened economy
Peruvian leftist presidential candidate Pedro Castillo of Peru Libre waves to supporters from his party headquarters balcony in Lima on June 8.

Peruvian leftist presidential candidate Pedro Castillo of Peru Libre waves to supporters from his party headquarters balcony in Lima on June 8.

Photographer: Gian Masko/AFP/Getty Images

Peru’s central bank held its key interest rate at an all-time low Thursday, but dropped its commitment to keep it there for “a prolonged period”.

The bank kept its benchmark rate at 0.25% for the 14th straight month, making good on its promise to provide liquidity to an economy hard-hit by the pandemic.

The decision comes as leftist candidate Pedro Castillo is leading the June 7 runoff election against Keiko Fujimori by 50.2% to 49.8% -- fewer than 70,000 votes, with 99% of ballots tallied. Fujimori -- a former congresswoman facing money laundering charges -- is questioning the results and has called for a recount in key districts.

Peru's dollar bonds are recovering as Castillo seeks to calm markets

“The board considers it appropriate to maintain a strongly expansionary monetary policy while the negative effects of the pandemic persist on inflation and its determinants,” the bank said in its statement.

Thursday’s interest rate decision was expected by all five economists in a Bloomberg survey.

“The forward guidance was tweaked; now slightly less dovish,” wrote Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., in a research note.

Given the continued guidance of stable policy rate and benign inflation outlook, Ramos said he expects the bank to start raising the interest rate only when activity is on a sustainable recovery path approaching pre-pandemic levels.

Read More: Peru Leftist Signals Victory With Almost All Votes Counted

Castillo’s Rise

The rise of Castillo, a 51-year-old former school teacher and union organizer with the Marxist Free Peru party, has rattled the country’s markets in recent weeks amid fears that he’ll upend Peru’s economic model.

News of his lead sent Peru’s bonds and currency plummeting before he calmed investors by ruling out radical measures such as expropriations and price and currency controls. He’s also promised to open up talks with business leaders.

What Bloomberg Economics Says

“Low and stable core inflation through May limits concerns about the higher headline print, and together with evidence of recovering economic growth and domestic demand losing momentum support the outlook.”

-- Felipe Hernandez, Latin America Economist

Peru last changed its interest rate in April 2020, when it cut it by a full percentage point -- giving the Andean nation the lowest benchmark rate of any major economy in Latin America.

(Adds comment from Goldman Sachs in 6th paragraph)