BCRP surprises the market by keeping the interest rate at 5.75%: Stability over economic recovery?

The Central Reserve Bank of Peru (BCRP) surprised the market by keeping its interest rate at 5.75% during the month of June, following two consecutive months of cuts. This decision contrasted with analysts' expectations, who anticipated a reduction to 5.50% due to controlled inflation and the weak economic situation in the country. The pause in the cycle of cutting the benchmark rate, the second in nine months, is due to two powerful reasons according to the BCRP. Firstly, core inflation, which excludes the most volatile prices, showed an increase from 3% to 3.1%, surpassing the target set by the issuing institute. This is mainly due to the prices of services such as fuels and transportation, which remain high. Jorge Chávez, president of Maximixe, supports this decision by pointing out that gas station margins and transportation costs remain high, contributing to the increase in core inflation. Additionally, another determining factor for the BCRP's pause is the narrow gap between its rate and that of the Federal Reserve of the United States, which ranges between 5.25% and 5.50%. Chávez highlights that if the BCRP had reduced its rate while the Fed maintains theirs, it could have triggered a capital outflow in search of safer investments in the US market, which in turn would have put upward pressure on the exchange rate in the country. This situation reflects a preference for the safety of investing in the United States, despite Peru having a low country risk in the region. The rise of the dollar against the sol in June, from S/ 3.72 to S/ 3.77, is partly attributed to the proximity between interest rates in Peru and the United States. This situation has raised concerns in the local market about the possibility of a capital migration towards the US market in search of higher returns. The BCRP's decision comes at a time when the Minister of Economy and Finance, José Arista, had urged the central bank to be more proactive in reducing its interest rate to boost economic recovery. However, the BCRP has prioritized monetary stability over the risks of high core inflation and the narrow difference with the Fed's rates. Despite the differences in approach between the BCRP and the MEF, both entities collaborate on macro-financial aspects. While the BCRP focuses on preserving monetary stability, the MEF seeks to reduce the fiscal deficit to improve the country's risk rating and lower borrowing costs, in a joint effort to strengthen the Peruvian economy. Ultimately, the BCRP's decision to pause the reduction of its interest rate responds to the need to maintain a balance between monetary stability, controlled inflation, and prudence in a global scenario marked by the proximity between interest rates in Peru and the United States. Despite pressures and exhortations, the issuing institute has opted for a cautious stance aimed at protecting the national economy in an uncertain global environment.