LIMA -- Peru's central bank left its monetary policy rate unchanged at 3.25% in this week’s meeting.
The central bank did, however, make meaningful changes to its tone regarding inflation, adopting a more hawkish stance.
The bank stated that the current level of the policy rate was consistent with the convergence of inflation to the target range in the 2015-2016 forecast horizon.
This sentence previously stated that the level of the policy rate was consistent with the convergence of inflation to the 2.0% target in the policy horizon.
The bank also described that the supply side factors that have affected inflation on the upside are currency depreciation, food, fuel, and utility prices.
The bank noted that inflation expectations have increased to levels “similar” to the target range ceiling (3%).
This is the second month in a row in which the bank modified its language regarding inflation expectations.
In the June press release, it said that inflation expectations had increased but remained within the target range.
The guidance paragraph stated that the bank would remain watchful of the projection of inflation and its determinants to consider, if necessary, adjustments on the policy rate that drive inflation to the target range in the policy horizon.
In the view of analysts, this wording is indicative that the bank is decisively thinking of interest rate increases.
In previous communiques, the central bank had just recognized that it could consider changing its monetary policy stance depending on the projection of inflation and its determinants.
Analysts now think that there is a high probability that the bank will increase the policy rate this year rather than in 2016, especially if headline inflation fails to converge to the target range fast, or if inflation expectations for 2016 or beyond surpass the 3.0% target range ceiling.
Analysts also think a faster depreciation of the currency -- as seen in the past few days -- could be a possible catalyst for a rate hike.