LIMA -- Peru's central bank increased the policy rate 25 basis points (bp) to 3.5% in this week’s monetary policy meeting.

The decision was against the consensus expectation that the central bank would leave the policy rate unchanged at 3.25%.

The central bank reiterated that it would remain watchful to the projection of inflation and inflation expectations to consider further adjustments of the policy rate to drive inflation towards its target range, if necessary. However, it added that yesterday’s rate hike did not mean that a hiking cycle had begun.

The bank also mentioned that the new policy rate was compatible with a real interest rate of 0.5%, which corresponds to an expansive monetary policy stance.

The Central Bank also repeated its message from previous meetings that the level of the policy rate is compatible with the convergence of inflation to the 1% - 3% target range in the 2015-2016 forecast horizon, and that inflation expectations have increased to levels similar to the upper boundary of the target range.

It stated that inflation had been affected by temporary factors such as a weaker exchange rate and food prices, which should not pass onto the rest of prices in the economy in a generalized manner. This last assessment regarding inflation was new relative to previous statements.

Regarding growth, the bank noted that economic activity has been recovering in a gradual manner, and that 2016 real GDP growth should be similar to the economy’s potential growth rate.