Peru's central bank lifts key rate to 4.5% amid rising inflation

what happened

Peru's central bank increased its policy rate by a quarter point to 4.50%, a move the market had already priced in, according to Reuters. Policymakers pointed to supply disruptions, inflation expectations that have moved higher and solid domestic spending as reasons to act.

Inflation climbed to 5.3% in October, up from 4.5% a month earlier, with food and energy costs doing most of the work. Twelve-month expectations reached 3.1%, just above the top of the bank's tolerance band.

The bank was clear that this step does not automatically mark the beginning of a longer run of increases, and it expects inflation to drift back toward the target as supply shocks ease. It also flagged El Niño and tensions in the Middle East as risks that could keep prices elevated.

why it matters

Peru's sol may find some support from a higher local rate, which also makes local assets more attractive to carry investors. The bank hinted, however, that this hike could stand alone, so traders will watch its next decisions closely.

market impact

Peruvian sol and local bonds: a higher policy rate supports the currency and yields

• ▲Peruvian sol pressure up — a higher policy rate makes local assets more attractive to carry investors

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instruments