One economic analyst jokes that, in a country with Peru’s history of political instability, Julio Velarde deserves an award just for surviving three different presidents.
Alan García, Ollanta Humala and now Pedro Pablo Kuczynski, who was elected president earlier this year, have all put their faith in Velarde to steer Peru’s monetary ship.
“Politically, Peru has a history of instability, but on the monetary side there is a very high level of confidence,” says Alvaro Vivanco, head of Latin America fixed income and macro strategy at BBVA. “Investors know that Peru’s central bank will not give them any surprises; they’re excellent at following the rule book and doing their homework.
“Velarde exemplifies the concept of central bank stability.” As one rating agency official points out, “in the world of central banking, not being controversial is a good thing”.
And there is “no danger of a surprise while Velarde is at the helm”, believes Franco Uccelli, who covers Peru for JP Morgan’s emerging market research team.
In the past year, emerging markets FX volatility has seen inflation shoot way above target even in countries with very well respected monetary authorities such as Colombia, where it hit a 15 year high of 8.2% in May compared to a target rate of 3% plus or minus a point.
Although inflation in Peru has spent most of the past 12 months above the target of 2% plus or minus a point, peaking at 4.6% in January, analysts credit BCRP with doing a very good job of controlling it. Inflation has fallen steadily since January and crept back within the target range in August as it fell to 2.94%.
Uccelli said he believes year-end inflation will be “comfortably within” the target range.
“Peru’s inflation record has been remarkably stable recently and that makes it stand out from much of Latin America,” he says.
The JPM economist adds that Peru’s target is “strict, especially for an EM economy”.
“The fact Peru has such a low target tells you a lot about the country’s unwavering commitment to keep price pressures contained,” he says.
Moreover, faith in monetary policy means Peru has not had to raise rates since a 25bp hike to 4.25% in February. This is helping Peru become one of the fastest growing economies in Latin America this year, with JP Morgan predicting growth of 4% in 2016 and 4.5% in 2017.
All this happens amid the “constraints of high levels of dollarization”, which one rating agency official says makes BCRP’s task even tougher.
But efforts to de-dollarize the economy are paying off, says Uccelli, marking this down as a plus point for Velarde’s credentials.
Having reached 47% earlier in 2016, the dollarization of private sector deposits in Peru had dropped to 43% by July. Although the percentage climbed to 43.8% in August, Uccelli said in a research note that this was a “minor setback”.