Peru's central bank ups reserve ratio for Sol currency

February 29
6:46 AM 2016

Central Reserve Bank of Peru has decided to increase local currency bank reserve requirements (reserve ratio). Peru's monetary authority will increase bank reserve requirement for its currency Nuevo Sol to one percent in March from existing 0.75 percent. 

Capital reserve ratio stipulates the amount that should be kept at central bank by domestic banks. With an objective of ensuring enough liquidity in the domestic banking system, Central Reserve Bank of Peru is taking measures. To strengthen currency and regulating liquidity in interbank lending market, the central bank has decided to enhance capital requirement for its currency Nuevo Sol to one percent from March 2016 onwards. 

Reuters reports that steep fall of Peru's currency Sol against the US dollar, the central bank got into action. Central Reserve Bank of Peru has been supporting the economy by ensuring enough liquidity in the banking system. Peru is suffering from currency depreciation and rising inflation. 

Peru's currency Nuevo Sol plunged to 3.5205 per US dollar. The continuous depreciation of sol is worrying the Peru government. Central Reserve Bank of Peru has been on cautious note to support the ailing currency by regulating liquidity in the domestic financial system. 

Peru's monetary authority said in a statement: "The hike means financial institutions have to hold around 170 million soles ($48.29 million) more in deposits in the central bank."

Bloomberg further adds that Peru's central bank has raised capital reserve ratio for currency Sol for the first time since 2013. With inflation hovering at four-year high, the recovery in economic activity is requiring more funding support from the domestic banking system. Central Reserve Bank of Peru has increased overnight rate for four times during the past six months. 

Inflation rate in Peru economy seems to be slowed down to 4.5 percent in February 2016 from 4.61 percent in previous month. Peru's central bank targets inflation to be in the range of one percent to three percent bracket. The government's statistics agency will announce inflation figures on 1 March 2016. 

Recently, Central Reserve Bank of Peru raised monetary policy interest rate by 25 basis points to four percent. The central bank wants to maintain policy rate compatible with inflation so that it should be within the target level for 2016. Rise in food products prices and utilities are adding to inflation rate. Central Reserve Bank of Peru sees mixed signals from global economy, while high volatility in foreign exchange and external financial segments, according to BCRP (Board of the Central Reserve Bank of Peru). 

After witnessing the accelerated economic growth during the fourth quarter of 2015, central bank raised rates. The copper production is also increasing. Central bank is exploring all the possible measures to ensure that inflation will be at the targeted level.

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