PERU – BCRP holds at 4.25% again, in line with expectations

At its July Monetary Policy Meeting, the BCRP kept its benchmark rate unchanged at 4.25% for a tenth consecutive meeting, in line with market expectations. Forward guidance remained unchanged and explicitly data-dependent, with the Board reiterating that it will closely monitor incoming information on inflation and its determinants, and stand ready to adjust the monetary policy stance if necessary.

The communiqué continues to characterize recent inflationary pressures as temporary, reflecting energy price shocks and adverse weather conditions. The central bank projects that both headline and core inflation will return to the target range and converge toward 2% over the forecast horizon as the effects of these supply shocks dissipate. However, it also highlighted the risk that a more intense El Niño event and geopolitical tensions in the Middle East could have more persistent effects on inflation.

Regarding activity, leading indicators through June continue to signal solid economic momentum. The BCRP noted that most indicators of current conditions improved relative to the previous month, while all expectations indicators posted significant gains and remained in optimistic territory.

The assessment of the external environment became somewhat more constructive. The BCRP noted that global risks have moderated recently due to easing geopolitical tensions in the Middle East and the relative normalization of oil supplies. Nevertheless, uncertainty related to geopolitical developments remains elevated. In this context, the outlook for global growth remains positive and Peru’s terms of trade continue to be favorable.

Overall, the real policy rate is estimated at around 1.4%, remaining below the BCRP’s neutral level of approximately 2.0%.

Our take: The July statement was broadly unchanged and reinforced the BCRP’s wait-and-see approach. The Board maintained its view that current inflationary pressures are largely transitory, while acknowledging upside risks associated with a stronger El Niño event and geopolitical tensions. We continue to expect the BCRP to resume its tightening cycle later this year, delivering a cumulative 50bp of rate hikes by year-end and bringing the policy rate to 4.75%. The next Monetary Policy Meeting is scheduled for August 13.