(Bloomberg) -- Peru cut interest rates to the lowest level among Latin America’s major economies as slower core inflation eased one of the central bank’s top concerns and the economic rebound came to a sudden halt.
The central bank lowered its benchmark rate by a quarter percentage-point to a two-year low of 5.25%, as forecast by 10 out of 13 analysts surveyed by Bloomberg. The other three had expected the bank to hold rates at 5.5%.
Policymakers have been concerned about core inflation - price increases excluding food and energy costs - as it hovered stubbornly for months around the 3% mark. But in August, the core price gauge slowed to 2.78%, while overall inflation hit 2.03%, the center of the central bank’s target range.
The central bank said in its statement that the rate cut does not necessarily imply that future reductions will also be made. It added that headline inflation was expected to remain within the bank’s target band of 1%-3% inflation, while core inflation would continue to slow.
The Andean nation has the lowest inflation among Latin America’s major economies, as well as lower than the US, the Eurozone and Japan. It now also has the lowest borrowing costs among the region’s main economies, after previously being tied with Chile.
Expectations that the Federal Reserve will cut interest rates soon also helped pave the way for the cut. Peru’s rate is now equal to the lower of the Federal Funds Rate, which is normally seen as a floor for emerging market economies due to the potential for devaluation of their currency. But central bank President Julio Velarde has said that Peru could up to 1 percentage point below the Fed.
Peru is recovering from a recession in 2023, with growth this year having beaten expectations before slowing significantly in June. The national statistics agency INEI will release July economic activity numbers on Sunday.
(Adds details from central bank’s statement in fourth paragraph)
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