Financial Market Development and Monetary Policy: The Peruvian Experience

In parallel with the adoption of an inflation-targeting framework and the use of the interest rate as an operational target in Peru, the creation of a secondary market for central bank securities and government bonds improved the depth and liquidity of the fixed-income market and fostered the development of a risk-free yield curve. Other contributing factors include the country’s strong macroeconomic fundamentals, an improved sovereign credit rating, an external environment of low interest rates, and abundant global liquidity following the global financial crisis. In particular, the development of the sovereign bond market has improved the pass-through of the benchmark interest rate to other market rates in local currency. In Peru, financial intermediation occurs primarily through bank credit, and companies in the non-financial sector are the main participants in the domestic capital market. Consequently, although the bond market is not fully developed, the transmission of monetary policy is just as effective as in other countries in the region. The structure of the Peruvian financial system also contributes to the effectiveness of unconventional policy measures, as the macroprudential instruments used (for example, reserve requirements) operate through their impact on banks.