In just over 30 years, Peru has transformed from a hyperinflationary economy, where multiple exchange rates coexist, to a dual monetary system, where inflation is around 2% per year. Peruvian-style stabilization is a case study among government officials and economists in the City of London.
Yesterday boss Central Bank of Peru, Julio Velardefiled in The main conference was organized by IERAL and Fundación Mediterránea. He talked about the main characteristics of the stabilization process in Peru and the factors that allowed this – Reducing inflation from hyperinflation levels to a stable system based on floating exchange rates, inflation targets, and the accumulation of reserves.
Velardi noted that the starting point of the program was a critical situation. “We started with hyperinflation. “Inflation has reached approximately 12,000% annually.”He said. As he explained, one of the central elements was to eliminate monetary financing of the Treasury once and for all. “No one thinks about asking the central bank for money to fund the government. That has been buriedHe added that this principle has been maintained even in periods of political or economic crises: “There is consensus. “It doesn’t cross anyone’s head.”
The official noted that dollarization in Peru arose as a result of the deterioration of the local currency during hyperinflation. He pointed out that “people received their salaries in the local currency and on the same day converted them into dollars.” As he explained, this behavior was spontaneously reinforced: ““Dollarization arose naturally, it was not imposed.” He also highlighted thatPeru’s constitution guarantees that anyone can save in the currency of their choice. “The citizen is free to save in any currency. The money belongs to the citizen, not the government.” He said.
Regarding exchange rate policy, Velarde emphasized that Peru operates on a managed float system. He pointed out that “the exchange rate was floating… but it was somewhat false.” He explained that the goal is not to determine the price, but rather to mitigate sudden movements: “I have no commitment to any level of the exchange rate. I only seek to avoid fluctuations.” He pointed this out The central bank buys dollars when the value of the currency rises excessively, and sells them when it depreciates rapidly, in addition to using exchange derivatives when necessary.
Velardi stressed the importance of accumulating international reserves. “We intervene because our interventions are credible. They are credible because we have reservations.” He said and explained that the coffers of the Peruvian Central Bank currently amount to about 90.8 billion US dollars.
As detailed, part of the increase in inventory was a response to the need to avoid sudden rises in the value of the Sol during periods of strong capital inflows: “The goal of many of our purchases was to prevent the currency from appreciating too much.” In response to a question about the risks of starting a stabilization program without sufficient reserves, he said categorically: The lack of “ammunition” exposes the economy to bouts of instability that are difficult to manage.
Regarding the inflation targeting system, he explained that the annual target of 2% is in line with international standards. “We are competing with the dollar,” he said. “If the United States wants to achieve 2%, we want that too.” He also pointed out that setting high goals in the countries of the region is not appropriate: “Targeting goals of 4 or 5% is not logical.”
Velardi also described BCRP’s response during recent crises, including the pandemic. “In crises we need three things: Overreact, have all the tools available and act quicklyHe explained that during the Corona virus crisis, liquidity lines in dollars and bonds were activated, and the purchase of securities in the secondary market was announced.
Finally, he pointed out that credibility is an essential element in the monetary system. “If it is not believed that the central bank will do everything in its power to reduce inflation, the policy signal loses its impact,” he said.