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

2/08/2021


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