Peru Cuts Key Interest Rate to 4.75% After Inflation Surprise

Peru's central bank, the Banco Central de Reserva del Perú (BCRP), has surprised markets by cutting its key interest rate to 4.75% in October 2024, following an unexpected decline in inflation. The move comes as a relief to businesses and consumers, as it eases borrowing costs and supports economic growth. However, the central bank has emphasized that this rate cut does not signal the start of a continuous easing cycle, as real interest rates are approaching neutral levels.



The decision to cut interest rates was driven by several factors, including the recent inflation surprise, which saw inflation hit 2.01% in October 2024, just above the midpoint of the 1%-to-3% target range. This unexpected decline in inflation has put Peru in an enviable position, with inflation under control and lower benchmark borrowing costs than its neighbors. The central bank's chief economist, Adrian Armas, has outlined that policymakers are not cutting rates at a faster pace due to core inflation, which has cooled more slowly than overall headline inflation. However, core inflation slowed to 2.5% in October, paving the way for a cut.



Peru's economy has also been growing faster than expected, with the government hopeful that it can beat initial forecasts of 3% growth for the year. The central bank has acknowledged this growth, stating that economic activity has been beating expectations, putting less pressure on the independent central bank to cut rates. Additionally, the government is optimistic about the potential economic boost from hosting world leaders from the Asia-Pacific region.

The central bank's decision to cut interest rates has been welcomed by the market, as it supports economic growth and eases borrowing costs for businesses and consumers. However, the central bank has emphasized that it will continue to monitor inflation and economic trends, adjusting policy as needed to maintain price stability and support sustainable growth.

In conclusion, Peru's interest rate cut to 4.75% in October 2024 is a positive development for the country's economy, as it supports economic growth and eases borrowing costs. The central bank's decision was driven by a combination of factors, including the recent inflation surprise, core inflation slowdown, and economic growth. However, the central bank has emphasized that this rate cut does not signal the start of a continuous easing cycle, and it will continue to monitor inflation and economic trends to maintain price stability and support sustainable growth.