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Peru holds rates at 4.25%; inflation pressures to drop

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Peru holds rates at 4.25%; inflation pressures to drop PART 1 OF 1

Peru holds rates at 4.25%; inflation pressures to drop

Peru holds rates at 4.25%; inflation pressures to drop

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The reference interest rate is a tool used by many central banks (the U.S. Federal Reserve included) to implement monetary policy. The rate refers to the overnight lending rate used by banks to borrow and lend money to each other, including the central bank, in the overnight market. A lower rate implies a lower cost of capital for the banks, which cascades down through the market participants and the businesses in the country. Lower rates imply a lower cost of debt, hence companies have more resources to invest in growth and the stock market rises to reflect the growth potential. Higher rates have the opposite effect, causing companies to curve spending and therefore slowing down growth, which causes the stock market to fall accordingly to reflect the expected diminished growth.

The Peruvian Central Bank (BCRP) maintains an inflation targeting policy that aims to keep inflation between 1% and 3%. There was speculation among investors on whether or not the reference rate would be increased to curve the increasing inflation, which had further increased to 3.74% from its 3.53% value in August.

 On October 11, 2012, the BCRP held its lending rate steady at 4.25%. The brief statement released mentioned that the increase in the twelve month inflation was mainly attributable to perishable goods due to adverse weather conditions. Excluding food and fuels, the inflation increase in September was negligible, at -0.04%. Products such as potatoes and some citrics were the culprits of the inflation spike and the BCRP expects inflation to return to the target range in the long term. It further stated that current and forward looking indicators pointed to the economy having stabilized at the long term sustainable growth rate, though external debt indicators seem weak.

The actions by the BCRP to maintain rates steady is positive for investors in iShares MSCI All Peru Capped Index Fund (EPU) since it shows the Central Bank’s confidence in the Peruvian economy’s long term performance and recognizes that short term negative effects will disappear in the long run.

 

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