Peru unexpectedly halted its steepest-ever series of interest rate hikes as violent unrest paralyzes swathes of the economy and dents the growth outlook.
(Bloomberg) — Peru unexpectedly halted its steepest-ever series of interest rate hikes as violent unrest paralyzes swathes of the economy and dents the growth outlook.
The central bank left its benchmark interest rate at 7.75%, following 18 straight increases that took borrowing costs from a record low to the highest in more than two decades. Only one of 11 analysts surveyed by Bloomberg forecast the decision, while the others had all predicted a quarter percentage-point increase.
“This pause doesn’t necessarily imply the end of the cycle of interest rate increases,” the bank said in its statement. “Future adjustments will depend on new information on inflation and its causes, including the macroeconomic effects of the recent social situation.”
Earlier on Thursday, Mexico’s central bank surprised economists in the opposite direction, by unexpectedly accelerating the pace of monetary tightening in response to strong inflationary pressure.
In Peru, protests have raged almost every day since President Dina Boluarte took office in December, disrupting mining, tourism and agriculture. The central bank appears to be fretting about the risks of a sharp slowdown from the chaos, according to Felipe Hernandez, a Latin America economist at Bloomberg Economics.
“The decision to hold points to policymakers confident about current interest rates being enough to bring inflation down to the target, and concerned about evidence of weaker activity in 4Q and increasing downside risk in 2023 due to the protests,” Hernandez said, speaking before the announcement.
Brazil and Chile have also halted monetary tightening, while Colombia and Mexico have continued to raise rates.
Read more: Banxico Stuns Markets With Big Hike to Tackle Inflation Woes
No End in Sight
Protesters are demanding Boluarte’s resignation, which she has said is off the table, meaning there is no clear end in sight to the turmoil, which has now been going on for two months.
Several proposals to bring elections forward, with Boluarte’s endorsement, have also failed to gather support in congress.
Annual inflation accelerated to 8.66% last month, which was a smaller jump than forecast. The central bank targets annual consumer price rises of 1% to 3%.
Read more: Peru Supply Chains Show Surprising Resilience to Violent Unrest
Policymakers reiterated that that annual inflation would start to slow in March and return to the target range in the fourth quarter of this year.
Peru’s economy will grow 2.4% this year, the International Monetary Fund said in a report published Thursday, down from 2.7% in 2022.
(Adds comments from bank in third paragraph)
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