According to the chairman of the Banco Central de Reserva del Perú (BCRP), Julio Velarde, the Latin American country is on a clear path to bringing inflation down. The rate currently stands at 4.43%, close to meeting its target of 2% plus or minus 1%.
Mr Velarde spoke to The Banker following his speech at the Roadshow Invest in Peru 2023 conference, held on November 2 at JPMorgan’s London office, where he discussed Peru’s monetary and financial strategies that have helped the country navigate recent economic turbulence.
He emphasised that, in terms of inflation management, Peru has performed better than its regional peers and even some major international players. “Official results have been better than what we expected, and we expect core inflation to be within our targets this year,” he says.
Currently, Peru’s core inflation stands at 3.3%, much lower than some of the country’s neighbours, including Colombia, whose core inflation stood at 10.9% in September. Mr Velarde has a positive outlook for his country’s core inflation rate, which he expects will drop to around 2.5%.
Central bank actions
“The BCRP’s main tool to bring down inflation is to reduce interest rates, which is a blunt instrument, but it’s the most important one we have,” he says. “After a period of rises in the reference interest rate, we started reducing it in September as we have seen inflation starting to come down.”
On September 14, the BCRP made the first cut to its key rates since the start of the Covid-19 pandemic, reducing them by 25 basis points to 7.50% and then again to 7.25% at its latest monetary policy meeting on October 5. The decision mirrors similar paths taken by some of Peru’s neighbours, such as Brazil and Chile, who also began to reduce interest rates this year.
Peru saw its first slowdown in inflation back in August, when it dropped to 5.58%, at the time marking its lowest point since 2021. The central bank expects the trend to persist over the next few months as annual inflation continues to ease, potentially reaching the bank’s target range by the beginning of next year. Nevertheless, risks associated with climate change may hinder that projection.
Currently, Peru is battling with abnormal weather conditions caused by El Niño, which is the name given to a complex weather pattern that sees unusually high temperatures in the waters of the southern and eastern Pacific. The phenomenon, which recurs every two to seven years, results in more extreme weather conditions, with heavy rain in some areas and droughts in other parts of the country. As a result, normal crop cycles are strongly impacted, which in turn hits exports.
Political turbulence
In December last year, major protests erupted in the country when Peru’s former president, Pedro Castillo, was removed from office. The months-long protests represented the worst civil unrest the country had seen in more than two decades.
Asked how the recent political turmoil may have impacted the banking sector, Mr Velarde says that political uncertainty hasn’t had the same negative impact that it had in the past. “For some time now, we have been under the impression that the banking system and inflation rates haven’t been particularly affected by the current political climate,” he says.
Mr Velarde also stresses that banks have learned to put measures in place better to survive times of political instability and high market volatility. “Banks have become pretty cautious on what they land and how much they expand their balance sheets, with bigger banks having buffers in place to contain losses,” he comments.
Nevertheless, Mr Velarde says that the protests have had an impact on the economic growth of the country, which has slowed down compared to previous years. In September, the central bank lowered its economic growth forecast for this year from 2.2% to 0.9%.
Developing digital payments
According to a BCRP report, with data taken from Peru’s National Household Survey, only around half of the population over 18 years of age in Peru had an account in the formal financial system in 2021, of which just 25.3% reported using means of payment other than cash.
Mr Velarde says that some Peruvians may be deterred from interacting with banks because they prefer to safeguard their cash at home instead of handing it over to an institution. “Some people distrust big banks and find them quite intimidating, so institutions have resorted to utilising small shops as payment points to bridge the gap,” he says.
Additionally, Peru has invested in its economic growth by boosting its internet access. In 2021, the Peruvian Ministry of Transport and Communications launched a programme designed to boost internet penetration in the country and increase its number of users, which is predicted to reach over 23 million by 2025. Internet accessibility, matched with the growing use of e-wallets, is allowing more people to access financial services.
“Peru has been one of the fastest-growing nations in the region in terms of the number of digital payments,” says Mr Velarde, adding that internet accessibility has made person-to-person transactions a reality for many people across the country.
“Now, even a taxi driver from a small town that doesn’t have a taxi meter can receive e-payments, and we think that the system will keep on growing,” he adds.
