Development Of Monetary Policy In Peru

Development of monetary policy in Peru

Introduction

To achieve the price stability objective, the Central Bank seeks to foresee possible deviations from the inflation rate with respect to the goal. This anticipation is due to the fact that the monetary policy measures taken by the BCRP will affect the inflation rate mainly after some quarters.

Monetary policy measures correspond to modifications in the reference interest rate for the interbank market. Depending on the conditions of the economy (inflation or deflationary pressures), the BCRP modifies the reference interest rate preventively to maintain inflation at the level of the goal. In order for the inflation goal to be credible and achieve its purpose of anchoring inflation expectations, it is important that the BCRP communicate to the public how it tries to achieve it and the arguments that support its decisions.

This report aims to analyze monetary policy in the country in specific aspects that will help us better understand the situation of the economy of Peru, the monetary policy that affects interest rates and therefore the levels of investment, aSynthesis of monetary policy in some periods of governments of the last century in order to understand and better understand these concepts and their application in the economy.

Development of monetary policy in Peru

Monetary policy in Peru aims. Thus, the design and implementation of monetary policy is carried out under a scheme of explicit goals of inflation (MEI), through which the Central Reserve Bank (BCR) seeks to anchor the inflation expectations of economic agents through the announcement through the announcementof an inflation goal, which is currently 2%, with a level of tolerance of +/- 1%.

The BCRP directory reduced the reference interest rate of 2.75 to 2.50 percent in August, emphasizing its statement that "this decision does not necessarily imply additional reductions of the interest rate". As a result of these monetary policy actions, the real interest rate was around 0.2 percent in this period, below its estimated neutral level at 1.50 percent. This expansive monetary policy position is consistent with an inflation rate that is located around 2.0 percent in the projection horizon, with downward bias due to the possibility of growth in internal demand less than expected. (Central Reserve Bank of Peru, 2019)

Financial entities made higher deposits in the Central Bank (S/ 141 million in lace funds and S/ 4 222 million in other deposits) and acquired more BCRP values (S/ 2 040 million). This was compensated through report operations for an amount of S/ 3 562 million. Likewise, there is a growth within the auctions of the public treasure deposits by the BCRP for S/ 1 300 million. This instrument has gained importance as a source of financing since 2017. Credit expansion would be funded mainly through deposits of deposits. Also, during 2019 and 2020 it is projected to withdraw liquidity by means

With this expansive monetary position, credit to the private sector grew 8.1 percent year -on -year in August, mainly due to the increase in credit to natural persons, which grew 11.4 percent. For the projection horizon, credit to the private sector as a percentage of GDP would increase from 42 percent in 2018 to 44 percent in 2020. This evolution takes into account flexible monetary conditions and the gradual recovery of demand growth. Interannual inflation went from 2.3 percent to June 2.0 percent in August 2019, located in the center of the target range. Inflation expectations, which since March 2017 remain within the target range, were located at 2.3 percent in August and it is estimated to gradually decrease in an inflation context about 2 percent on the projection horizon.

BCRP monetary policy and interest rate

In the monetary policy schemes of inflation goals, such as the one that guides the Central Reserve Bank of Peru, the monetary policy interest rate responds to the future determinants of inflation to act in advance and effective way. In this sense, international factors, such as the Federal Reserve interest rate, can have an indirect effect on the BCRP monetary policy rate by affecting the product gap, exchange rate and imported inflation. However, the foregoing does not imply that Fed’s interest rate increases generate automatic increases from BCRP.

The Directory of the Central Reserve Bank of Peru surprised the market and decided to raise the reference interest rate of monetary policy despite the weakness of economic activity

The greatest flexibility in monetary conditions allowed interest rates in national currency to decrease in line with the reduction of the reference rate on August 8. Thus, while the interbank rate quickly converged to its new reference level of 2.50 percent, the preferential active and passive rates in installments between Overnight and 12 months decreased on average by 52 and 55 basic points, respectively. In that line, in September the differential of the corporate preferential active rates at 3 months with the reference rate was located at 112 basic points, minimum level observed since August 2018. Similarly, deposits and credits rates descended on average in 52 and 45 basic points, respectively. The expectation of the additional reduction market in the reference rate in 2019 and 2020, together with the highest availability of liquidity in banking companies product of BCRP injection operations have explained the recent trend in interest rates.

Interest rate and investment

To maintain inflation within the target range, the most common path that the BCR takes is to try to influence the interest rate in the interbank market, that is, the rate that banks charge among themselves in their very short -term operations to place itIn a reference rate previously set by its directory, this is managed.

The BCRP directory reduced the reference interest rate at 25 basic points in August to 2.5 percent, in a more gradual closure context of the product gap with respect to what was expected and a downward bias in the projectionof inflation. This extends the monetary stimulus, with a real interest rate of 0.2 percent.

The level of investment in the economy is sensitive to changes in the prevailing interest rate. In general, if interest rates are high, investment decreases. On the contrary, if interest rates are low, the investment increases. This inverse correlation is key to understanding the relationship between interest rate and investment.

Conclusions

Monetary policy is the set of instruments and measures applied by the Government, through monetary authority, to control currency and credit, with the fundamental purpose of maintaining the economic stability of the country and avoiding a balance of adverse payments.

The objectives of monetary policy may hardly be achieved with the use of solitary monetary policy, since to achieve them, tax policies that are coordinated with monetary policy will be necessary. And, many times the mechanisms of monetary policy do not achieve the desired objectives, thus altering other factors.

The BCRP adopts monetary policy actions in advance in response to the projection of inflation and its determinants, which takes into account all available macroeconomic information. These include inflation expectations, imported inflation, and inflationary demand pressures that are quantified through the product gap (difference between the GDP observed and its potential level).

The reference interest rate governing the BCRP is a fundamental measure to measure economic stability;Since, in 2017, after the world financial crisis, many countries chose to reduce rates to 0%;in order to encourage the available income of people, and therefore, the increase in aggregate demand. However, the decrease in rates also brings negative consequences such as price increase;That is, the BCRP cannot decrease the reference rate today because the indicators show that it would almost be reaching the 3%inflation target range;In addition, that the economic perspectives have already increased and it is expected that at the end of 2018 the Peruvian economy will grow by 3.Approximately 8% with respect to last year.

References

1. Central Reserve Bank of Peru. (2005). Current inflation report and macroeconomic projections. Lima: Edition and Printing Area of the Central Reserve Bank of Peru.
2. Central Reserve Bank of Peru. (2016). Inflation report: current panorama and macroeconomic projections 2016-2017. Lima: Edition and Printing Area of the Central Reserve Bank of Peru.
3. Cuba b., AND., & Herrada v., R. (nineteen ninety five). Demand for money, inflation and monetary politics in Peru: 1991-1994. Jan. Cuba b., & R. Brown v., ECONOMY Notebooks (pages. 347-377).
4. Plascence, p. (2018, December 10). Impact of monetary policy on Peru in the current economy [thesis]. Retrieved November 9, 2019, from http: // repository.Ulima.Edu.PE/Bitstream/Handle/Ulima/8088/Plasencia_alva_Paolo_fernando.PDF?sequence = 3 & isalowed = y
5. Central Reserve Bank of Peru. (2019b, September). Current Inflation-Panorama Report and Macroeconomic Projections 2019-2020. Retrieved November 9, 2019, from http: // www.BCRP.Gob.PE/DOCS/PUBLICATIONS/REPORT-INFLATION/2019/SEPTEMBER/REPORT-DE-INFLATION-SEPTEMBER-2019.PDF
6. Central Reserve Bank of Peru. (s.F.). Public investment. Recovered from https: // statistics.BCRP.Gob.PE/STATISTICS/SERIES/ANNUAL/RESULTS/PM10081FA/HTML/2014/2019/