PERU – Large inflation upside surprise in July supports rate hikes

We now expect the central bank to start hiking its policy rate as soon as next meeting

Julio Ruiz


Inflation was above market expectations in July. CPI posted a month-over-month rate of 1.01% (from 0.46% a year ago), above our forecast of 0.36% and market expectations of 0.50% (as per Bloomberg). Upside pressure to headline inflation came mainly from higher energy (domestic gas: 10.1% and vehicle fuel gas prices:16.9%) and food prices (1.51%) - amid a depreciation of the currency and higher international commodity prices. Meanwhile, core inflation (exclude energy and food items) stood at 0.28% (from 0.03% a year ago). Annual headline inflation accelerated to 3.81% July (from 3.25% in June) remaining above the upper bound of the central bank target of 2%+-1% for second month in a row. Likewise, core inflation (exclude energy and food items) accelerated to 2.14% in July (from 1.89% in June).

At the margin, headline and core inflation accelerated sharply. The seasonally adjusted three-month annualized variation of the CPI was 7.41% in July (from 4.09% in June), while core inflation (excluding food and energy) stood at 3.17% (from 2.70%).

We now expect the central to start hiking its policy rate next meeting (August 12) amid increasing inflationary pressures and a weaker currency. The more cautious tone adopted in the recent monetary policy statements also supports our call. For instance, in June’s monetary policy meeting, the statement no longer mentioned that a lax policy will be maintained for a prolonged period (as opposed to previous statements). Later in the July’s monetary meeting, dropped “strong” (referring to the expansionary monetary policy stance ahead), while also eliminating the sentence: ”[the BCRP] is on alert to expand further the monetary policy stimulus”. As a result, there are upside risks to our 0.75% yearend policy rate forecast.

Julio Ruiz