Latin America’s longest-serving central bank chief, Julio Velarde, said he needs to be sure inflation has been brought under control before he can be more assertive with monetary policy in Peru.
(Bloomberg) — Latin America’s longest-serving central bank chief, Julio Velarde, said he needs to be sure inflation has been brought under control before he can be more assertive with monetary policy in Peru.
“We have to be sure inflation is defeated before we can be more aggressive,” Velarde told Bloomberg News during the annual International Monetary Fund meetings in Morocco. “We are going to see numbers, core inflation and expectations.”
The Peruvian central bank’s main signal to markets is one of caution that ensures that the country will move inflation to target, according to Velarde.
“We believe we are going to return to the inflation target, but that belief is based on the thought that we are going to adopt the monetary policy that is needed so we can effectively reduce inflation,” he said.
El Nino
Peru in September joined other major Latin American nations, including Brazil and Chile, in lowering borrowing costs as it sought to boost growth. The central bank delivered a second consecutive cut in October, reducing its benchmark interest rate to 7.25% from 7.50%.
Rising US Treasury yields will not be a problem for cutting borrowing costs in the region, Velarde said, because the Federal Reserve is expected to start reducing rates cautiously in the second half of 2024. At the same time, he said, central banks in Latin America are being equally cautious because inflation is still unanchored.
Read More: Peru Cuts Key Rate for Second Month After Recession Deepened
Annual inflation cooled to 5.04% in September but remains above the bank’s goal of 1% to 3%. Velarde initially predicted that it would ease to within the target range by the end of 2023.
But he recently warned that it may not hit that level until after the first quarter of next year, thanks to an El Nino that is expected to bring intense rains to Peru’s northern agricultural hub and could increase food costs. There is less than a 50% chance of a price impact from that weather pattern, he said.
“Core inflation in Peru will be within the target by the end of 2023,” he said. “Headline inflation will probably be April or March if there’s not effect from the El Nino phenomenon. If there is, it will probably be later.”
Adding to inflation uncertainty are surging tensions in Israel, though Velarde said it’s hard to know what will happen to oil prices amid the conflict.
Peru’s economy has underperformed in 2023 and contracted 1.3% in July from a year earlier, extending its recession. The central bank has already slashed its growth forecast for this year to 0.9%, down from its prior 2.2% estimate.
According to Velarde, the economy will still grow in 2023, even if expansion is below the official estimate.
–With assistance from Andras Gergely.
(Updates with more details from interview starting in 8th paragraph)
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