Interest Rate Cut to 4.5% Signals Peru’s Response to U.S. Tariffs and Economic Headwinds

The Central Reserve Bank of Peru reduced its benchmark interest rate by 25 basis points to 4.5% on May 8, 2025, as confirmed by the bank’s official statement.

The board’s decision followed four months of holding rates steady and came as a response to mounting external risks and a modest uptick in domestic inflation. The move surprised many analysts, who expected the rate to remain unchanged.

Peru’s annual inflation rate reached 1.65% in April 2025, up from a 1.28% low in March, but still within the central bank’s 1–3% target range for the thirteenth consecutive month.

Price increases in food, recreation, and services drove the rise, reflecting sector-specific pressures rather than broad-based overheating. Despite this, Peru’s inflation remains the lowest among major Latin American economies, giving policymakers room to maneuver.

The U.S. government imposed a 10% tariff on all imports from April 5, 2025, affecting Peru as its second-largest trading partner. The tariffs target key export sectors, including agriculture and textiles, and threaten nontraditional products such as fruits and vegetables.

Copper, a major Peruvian export, also faces potential tariffs. The Peruvian government responded by sending negotiators to Washington, aiming to protect its export interests and maintain trade flows.

Economic growth in Peru has slowed, with activity rising 2.7% year-on-year in February 2025, below expectations and before the new tariffs took effect. The Ministry of Finance revised its 2025 growth forecast down to 3.5%.

Private consumption remains robust, but uncertainty from trade tensions and upcoming elections clouds the outlook. Despite these challenges, Peru’s fundamentals remain solid. Public debt is low, international reserves are strong, and the country retains access to capital markets.

The Peruvian sol has appreciated, supported by high export prices, though some depreciation is expected as elections approach. The fiscal deficit is projected to fall from 3.5% to 2.4% of GDP in 2025.

The central bank’s rate cut aims to support economic activity without fueling inflation. Policymakers signal a data-driven approach, watching inflation and external developments closely.

Peru’s response reflects a pragmatic, mercantile strategy, prioritizing stability and competitiveness as it navigates global headwinds and shifting trade dynamics.