Peru Unexpectedly Cuts Interest Rate as Inflation Nears Target Band
(Bloomberg) -- Peru surprised economists by cutting interest rates while congress passed a bill allowing workers to withdraw $7 billion from pension funds as lawmakers and central bankers try to jumpstart a moribund economy.
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The central bank lowered its key rate to 6% on Thursday, a 20-month low, as forecast by just one of 13 analysts in a Bloomberg survey. The remaining 12 expected rates to be held at 6.25%.
Congress overwhelmingly passed a bill allowing workers to withdraw up to 20,600 soles each ($5,580) from their retirement savings. The government had opposed the bill but lawmakers can easily override a veto.
The bill is the seventh such pension fund withdrawal authorized since the pandemic, which has led to $24 billion in outflows. It could impact shares and bonds as pension funds are key buyers of both.
Some of it has already been priced in as the Lima Stock Exchange has plummeted since March 25, when the bill initially passed at the committee level.
Read more: Peru Passes Bill Allowing for $7 Billion in Pension Withdrawals
The bank downplayed concerns about persistent price pressures, saying that faster-than-expected March inflation had been “transitory.”
“We project that annual inflation will continue its downward trend and converge gradually to the center of the target range in coming months,” the bank said in its statement.
Peru’s economy is only gradually recovering from a recession, and investors are worried about a recent flare-up in political tensions. President Dina Boluarte is facing a probe into illegal enrichment following her use of several Rolex watches and other jewelry.
Boluarte survived two impeachment attempts this month over the scandal, and said in an address to the nation that the watches were a loan from an ally.
Read more: A $15,000 Rolex Threatens to Worsen Peru Leader’s Job Rating
Annual inflation has slowed significantly from a high of almost 9% in mid-2022 to 3.05% last month. Peru targets inflation of 2%, plus or minus one percentage point.
--With assistance from Rafael Gayol, Giovanna Serafim and Robert Jameson.
(Updates to add congressional vote on pension bill in headline, first, third-fifth paragraphs)
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