Last Friday, the Central Bank cut its policy rate to 3.0%. It was the fifth cut since May 2017, bringing the rate 125bp lower in total. Inflation has dropped to a 7-year low of 1.4% y/y in December 2017, down from 4% in March. This drop was mainly a result of a correction of the supply shocks that affected the Peruvian economy at the end of 2016 (water deficit) and early 2017 (El Niño) but also in the three previous years. Climatic disruptions have indeed been more frequent since 2014. The Central Bank’s move also follows a weaker than expected economic activity growth figure in November (+1.8% y/y after +3% in October and +3.1% in September). Moreover, it comes at a time of increased political instability: after avoiding an impeachment procedure, President Kuczynski pardoned former president Fujimori who had been jailed for twelve years, fueling social tensions.
