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Peru Cuts Key Interest Rate to Three-Year Low of 4.25%

(Bloomberg) -- Peru cut interest rates to the lowest level since 2022 after inflation unexpectedly plunged last month.

The central bank reduced its benchmark rate to 4.25% from 4.5% on Thursday, as forecast by eight of 15 economists surveyed by Bloomberg. Analysts were split, with seven of them expecting a fourth straight hold.

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“With this decision, the interest rate is very close to its estimated neutral level,” the bank said in its statement. “We forecast that inflation will be close to the center of its target range around the end of the year.”

Consumer prices rose just 1.11% in August from a year earlier, among the slowest pace among major emerging markets and close to the bottom of the central bank’s target range. Peru’s key rate is now the same as the bottom of the range set by the US Federal Reserve, which may limit further cuts in the near future. Central banks in Latin America are sometimes wary about lowering rates below those of the US for fear of triggering destabilizing outflows of capital.

Strong economic activity, which expanded 4.5% in June from a year earlier, may also deter much more easing.

Peru’s statistics agency will release July economic activity next week. The government expects full year economic growth of 3.5%, ahead most of its peers in Latin America.

--With assistance from Robert Jameson.

(Adds comment from central bank’s statement in third paragraph)