Inflation dropping further.  In June, consumer prices once again remained virtually unchanged (+0.06% over May) after last month’s mild 0.02% increase.  As a consequence, the annual inflation rate dropped to 3.2% in June from 3.3% the month before.  The June price increase was lower than what most analysts had expected.  The virtual price stability was mainly driven by lower food and beverage prices (-0.1%) and price declines in the communications and transport sector (-0.2%).  The health sector saw the highest price hikes (+0.6%) followed by the aggregate housing, fuels, and electricity, which registered an increase of 0.4%, according to INEI. 

Exchange rate recovers amid subsiding political jitters. The Nuevo Sol strengthened in June, gaining some of the ground lost in the wake of the political uncertainties related to the presidential elections.  Next to the more stable political climate, lower than expected inflation and the widely anticipated US Federal Reserve Board’s decision to maintain interest rates at their current levels provided for a more positive sentiment towards future developments in the Peruvian currency and contributed to the strengthening of the Sol. 

Electoral jitters subsiding. The concerns associated with the second round presidential elections on 28 May, which were tainted by fraud allegations, have subsided and Fujimori will assume his third term as president on 28 July.  Calls for sanctions have given way to a mission from the Organization of American States (OAS) sent to Peru to explore possibilities to strengthen the country’s democratic institutions.  The OAS mission, which visited Peru in June, has not given in to demands from former presidential candidate Alejandro Toledo to recommend new elections.  Instead, the mission set out recommendations for moves to ensure the appointment of independent judges, guaranteed press freedom, the overhaul of electoral process and improved civilian control over the intelligence services and armed forces.  The OAS announced its intention to set up a mission in the country to monitor progress, but there is no precise timetable for the implementation of the reforms and skepticism over whether Fujimori will actually adopt the recommended measures is widespread.  The State Department announced, the United States would consider other options if reform proposals are ignored.

Note:  The above text is an abridged version of the LatinFocus Consensus Forecast briefing on Peru.  For more details please click here.

For five-year forecasts, please click here.