In its 2006 report on Monetary Policy Transparency, Oxford Analytica (OA) rates Peru's compliance with this standard as "Compliance in Progress." The high professionalism and traditional strong independence are especially noteworthy characteristics of the Central Reserve Bank of Peru (Banco Central Reserva de Peru, or BCRP). The transition to a new government in July 2006 and the ensuing change of the Board of Directors were conduced transparently, by all accounts, and a planned draft bill intended to de-link the terms of the BCRP Board of Directors from the election cycle would enhance the independence of the institution. The communication policy and practice of the BCRP have been gradually upgraded from their already good base. The inflation-targeting framework seems to be working well, and the BCRP has switched to a continuous, monthly year-on-year target in 2006 instead of the previous end-of-year target, which also increases transparency. Peru maintains a unified, managed floating exchange rate. While the establishment of a free-floating currency remains a long-term policy objective, it is likely to be gradual.

General Overview

The 2006 Monetary Policy Transparency assessment of Peru by Oxford Analytica (OA) maintained its overall positive judgment of monetary policy transparency in the country. This judgment is chiefly based on the high professionalism and tradition of independence of the Central Reserve Bank of Peru (Banco Central de Reserva del Peru, or BCRP). The new government of Alan Garcia and the resulting nomination of a new BCRP Board of Directors have not affected monetary transparency. However, OA notes that the term of BCRP Board is identical to that of the President and Congress, which raises concerns regarding the independence and impartiality of the institution. The Ministry of Economy and Finance (Ministerio de Economía y Finanzas, or MEF) is planning a draft bill that would change the terms and prevent board members from holding additional jobs, although the current board has made progress in this area as its members are holding less exposed positions outside the bank. The new BCRP governor, Julio Velarde, is a highly respected economist whom OA expects to be more independent and market-oriented than his predecessor.

In its 2006 report, OA further notes some gradual improvements in the communication policy and practice of the BCRP, such as an online Q&A service for statistics and methodology on the BCRP website and more detail that is provided in the monthly statement on monetary policy decisions released by the BCRP. OA also mentions that some commentators would welcome a publication of the minutes of the board meetings, but that others believe the level of detail now provided in the monthly statements would add little additional value to such an exercise.

Peru maintains a unified, managed floating exchange rate. While the establishment of a free-floating currency remains a long-term policy objective, it is likely to be achieved gradually. OA argues that letting the currency float more freely would signal greater policy independence of the BCRP. The 2007 discussions with the International Monetary Fund (IMF) under the Stand-By agreement argued in a similar direction by advocating greater exchange rate flexibility. Still, the IMF staff expressed support for the plan to further build up official reserves to avoid large swings in the real exchange rate. The gradual appreciation of the Nuevo Sol over 2006 was deemed "consistent with improved fundamentals, while helping remove perceptions of 'floors' in the market" (p. 14).

The BCRP operates within an inflation-targeting framework. According to the 2006 OA report, the central bank used inflation numbers at an end-of-year basis, consistent with practices in other countries with previously high inflation. In 2007, the IMF reported that the BRCP had switched to a continuous, monthly year-on-year inflation target, which is more transparent. The 12-month inflation rate declined below the 0.5 percent inner band in March 2007, but the IMF judged that the monetary policy stance was appropriate.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

CP

The 2006 OA report on monetary policy transparency rates Peru's compliance with this principle as "Compliance in Progress." The objectives of the BCRP are defined in the 1993 Constitution, which also enshrines the independence of the BCRP. The legal framework of the BCRP is further clarified in the Organic Law of the BCRP of 1992. The maintenance of price stability is the only objective of the BCRP, and an inflation-targeting framework is employed to achieve this goal. The 2006 OA report further explains that the BCRP uses "a reference interest rate for the overnight inter-bank lending market, and open market operations aimed at maintaining this short-term interest rate at the announced reference level" (p. 275). The operational autonomy of the BCRP is well established, and OA notes the good reputation of the BCRP, for its professionalism and its tradition of asserting its independence, as positive factors.

Open process for formulating and reporting monetary policy decisions.

CP

The 2006 OA report on monetary policy transparency rates Peru's compliance with this principle as "Compliance in Progress". The BCRP uses a short-term interest rate for the overnight inter-bank lending rate as its reference interest rate to implement its inflation-targeting framework. To achieve its target reference rate, the BCRP conducts open-market operations and makes a discount window and overnight deposit facilities available to commercial banks reports. OA adds that the BCRP can intervene in the foreign exchange market if it is concerned with short-term volatility.

The decision-making body of the BCRP is the monetary policy board, the authority of which is enshrined in the Constitution and the BCRP Organic Law. The Board has seven members, four of whom are selected by the Presidency and three by the Congress. The board meets at least twice a month, according to the OA 2006 report, which adds that the advance meeting schedule is published in the first "Informative Note on the Monetary Program" of the year. In total, the BCRP publishes eleven different periodic publications in Spanish. OA also reports that "the Annual Report includes an evaluation of monetary policy and BCRP targets during the previous year, the BCRP balance sheet, and an overview of the monetary program for the following year" (p. 278). In addition, the BCRP's Weekly Report offers statistical tables of net international reserves, exchange rates and inflation, trade balance, public sector accounts, external accounts, external debt, and monetary accounts.

Public availability of information on monetary policy.

FC

The 2006 OA report on monetary policy transparency rates Peru's compliance with this principle as "Full Compliance". The 2007 IMF review under the Stand-By Agreement states that "Peru has been in observance of the Special Data Dissemination Standard (SDDS) since August 1996 and meets the specifications for coverage, periodicity, and timeliness of the data categories" (p. 50). The IMF report also notes that statistics disseminated by the agencies in Peru are largely satisfactory for surveillance and monitoring. The 2006 OA assessment explains that "emergency lending rules are set out in Articles 58-59 of the BCRP Organic Law. The BCRP may perform lending operations to private financial institutions facing financial distress, when guaranteed with first-class securities and for periods of no more than 30 days" (p. 280).

Accountability and assurances of integrity by the central bank.

CP

The 2006 OA report on monetary policy transparency rates Peru's compliance with this principle as "Compliance in Progress". According to OA, the BCRP must report to Congress on monetary policy conduct, objectives, and performance. The BCRP is accountable for deviations from monetary policy commitments, and oversight of its financial statements falls to the Superintendence of Banks, Insurance and Pension. External oversight of the BCRP is also carried out by the Comptroller General.