1. 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

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

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

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

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

6. 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.

7. 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.

8. 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).

9. 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.

10. Interbank interest rate and nominal exchange rate

11. 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.

12. Inflation forecasting

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

14. 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.

15. Private issues in domestic currency are increasing...

16. ...as well as bank lending in soles

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

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

19. Peru has resumed economic growth since 2002

20. Sustainable External Accounts
% of GDP
* Forecast

21. Real Exchange Rate

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

23. Indicators of External Vulnerability: 2002

24. 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