Peru central bank weighs interest rate hike as early as next month

Peru's central bank said on Friday it was considering raising its benchmark interest rate as early as next month amid higher inflation expectations and an expected tightening of monetary policy in the United States. The central bank held the key rate at 3.25 percent for the seventh month in a row on Thursday, a level Central Bank Chief Economist Adrian Armas called "very expansive." But the slipping sol currency has fueled inflation, a trend that could continue as the US Federal Reserve gets closer to a possible raising of interest rates.
"The conversation ... is when the bank is going to start that withdrawal of monetary stimulus through an increase in the benchmark interest rate," Armas said in a conference call with reporters. A rate hike could come as soon as next month, Armas said. "We're going to see what new information we have between now and the next monetary policy meeting on September 10...to make a decision," Armas said. "The latest data we're observing raises the probability that the withdrawal happens sooner."
The central bank lowered the interest rate by 25 basis points four times in the past two years to counter a sharp economic slowdown. But the economy has been showing signs of a recovery - expanding by 3 percent in the second quarter on the year, up from 1.7 percent in the first quarter and 1 percent in the fourth. Inflation, in the meantime, has risen to 3.56 percent - the highest annual rate in more than a year - in part because of the eroding exchange rate's impact on consumer goods.
The sol has weakened by about 8.5 percent this year despite the central bank's frequent interventions in the local spot market. The sol fell to a new low in more than six years Friday even as the central bank sold $108 million to counter its losses. Armas said the central bank was closely watching the currency's impact on inflationary expectations. "If they are affected, it's more probable that the central bank withdraw its current monetary stimulus position more quickly," Armas said. Market expectations for full-year 2015 inflation rose to 3.15 percent from 3 percent previously, according to a poll of analysts by the central bank on Saturday. The central bank said that the weather pattern El Nino could also squeeze prices.