Monetary Policy in Peru XIX Meeting of the Latin American Network of Central Banks and Finance Ministries Monetary Policy in Peru Adrián Armas Banco Central de Reserva del Perú November 2003

Content Monetary Policy during Disinflation: 1991-2001 Adoption of Inflation Targeting Financial Developments Macroeconomic Developments

Legal framework of the Central Bank Unique goal: To preserve monetary stability. Prohibitions: Credit to the government Credit to development banks Multiple exchange rates

Monetary policy: 1991-2001 Money base control. Since 1994, the Central Bank started to announce annual inflation targets.

Content Monetary Policy during Disinflation: 1991-2001 Adoption of Inflation Targeting Financial Developments Macroeconomic Developments

Adoption of Inflation Targeting The adoption of IT was on January 2002: Target: 2,5-percent CPI inflation (YoY) Tolerance: +/- 1 percentage point Peru is the first country adopting IT with high financial dollarization. Context of inflation rate below the target.

Reasons for adopting Inflation Targeting With a low and stable inflation rate, indicators of future inflation other than base money become more important to monetary policy. IT contributes to get confidence on long-run control of the inflation in both ways: level and variability.

Operating target Since 2001, both the operating target (a range for average banks’ reserves at the Central Bank) and the benchmark interest rates for Central Bank operations are announced monthly (first Thursday of each month).

Reducing variability of interbank interest rate A clear signal to the market about the desired evolution of short-term interest rates allowed to make monetary policy more predictable.

Interbank interest rate and nominal exchange rate

Clause of escape In case of financial distress, the Central Bank allows the interbank interest rate to be higher than its reference rate for lending operations.

Inflation forecasting

Content Monetary Policy during Disinflation: 1991-2001 Adoption of Inflation Targeting Financial Developments Macroeconomic Developments

Recent development of domestic public debt Treasury has developed a benchmark (up to 5-year bonds) to determine interest rates of assets denominated in domestic currency.

Private issues in domestic currency are increasing...

...as well as bank lending in soles

Dedollarization Dedollarization is a voluntary and gradual process that will occur along with the recovery of confidence on savings in domestic currency.

Content Monetary Policy during Disinflation: 1991-2001 Adoption of Inflation Targeting Financial Developments Macroeconomic Developments

Peru has resumed economic growth since 2002

Sustainable External Accounts % of GDP * Forecast

Real Exchange Rate

Reduction of the Fiscal Deficit Continuous reduction of the fiscal deficit. Target: 1,9% of GDP in 2003 % of GDP

Indicators of External Vulnerability: 2002

Monetary Policy in Peru XIX Meeting of the Latin American Network of Central Banks and Finance Ministries Monetary Policy in Peru Adrián Armas Banco Central de Reserva del Perú November 2003