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Peru: Business confidence rebounds, interest rate still at 3%

Staff Writer |
The business confidence indicator in Peru rebounded to 58.5 in January, significantly above December’s 53.7.

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Therefore, the indicator moved further above the 50-point threshold that separates optimism from pessimism, indicating that businesses grew more optimistic in January.

Driving the turnaround in business sentiment were broad-based improvements in both assessments of the current business situation and expectations on the future.

In particular, firms had more favorable assessments of their current sales and production levels as well as of new business orders.

Moreover, they had more optimistic expectations about the general economic situation, their specific sector of activity and their own company in the next three and twelve months.

Panelists expect fixed investment to contract 4.9% in 2018, which is unchanged from last month’s forecast. For 2019, panel participants see investment growing 3.8%.

At its February 8 monetary policy meeting, the Central Bank of Peru (BCRP) decided to keep the policy interest rate at 3.00%, following a cut in January and four cuts in 2017.

The Bank’s decision was motivated by declining inflation and inflation expectations, and below-potential economic growth.

Inflation dropped further from 1.4% in December to 1.3% in January, an over seven-year low, approaching the lower bound of the Central Bank’s target range of 1.0% to 3.0%.

A reversal of supply shocks and below-potential economic growth were behind the slowdown. Inflation not counting food and energy also moderated, as did inflation expectations for the next 12 months.

Moreover, economic activity continued to expand below potential in Q4, as shown by declining readings for the indicator of economic activity (IMAE) in both October and November and weakening business and consumer confidence in the last two months of the year.

Moving into 2018, business sentiment strengthened in January, although consumer confidence continued to lose ground.

Consumers remained largely pessimistic following the uncertainty produced by the recent political developments; they also broadly believed that the government is not taking sufficient measures to revive the economy.

For these reasons, the Bank expects inflation to remain close to the lower bound of its target range in the first months of 2018 and then converge to its 2.0% target.

The Bank’s statement was again devoid of strong forward guidance. The BCRP expressed, however, its readiness to modify its monetary policy stance if new information on inflation were to make it necessary. The next monetary policy meeting will be held on March 8.

FocusEconomics Consensus Forecast panelists see the monetary policy rate ending 2018 at 3.43%. For 2019, the panel projects a rate of 3.78% at the end of the year.

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