In its September meeting, the Central Bank of Peru (BCRP) cut the policy rate by 25-bps to 5.25%, in line with our call and market expectations (according to Bloomberg). The decision takes place after the unexpected 25-bps cut in August. The statement repeated the data dependent guidance, keeping the door open for further rate adjustments depending on inflation (emphasizing the core index) and its determinants. In parallel, the central bank also cut its reserve requirement rate to 5.75%, from 6.0%, after cutting it by 25-bps in August.
The BCRP’s decision to cut takes place as headline inflation has been within the target range (2+/-1%) for five consecutive months, and core inflation fell within the range in August. Headline and core inflation stood at 2.03% and 2.78% in August, respectively. The central bank expects annual inflation to remain around the central target. Twelve-month inflation expectations fell further to 2.44% in August from 2.49% in July. Following the decision, the real ex-ante rate fell to 2.81% (from 3.06%), still above the neutral rate of 2.0%. For context, the BCRP has brought the policy rate down from a peak of 7.75% in September 2023 to the current 5.25% and has complemented its monetary policy decisions with gradual reductions to the reserve requirement (from 6.75% in March to 5.75%).
Our take: While the BCRP has made substantial progress on bringing the policy rate closer to neutral over the course of the last year, we believe the central bank is likely to deliver an additional reduction later this year to 5.0%, in the context of well-behaved inflation and inflation expectations that are gradually converging to the target. The imminent beginning of the Fed’s easing cycle later this month should reduce concerns of exchange rate pressure, driven by the narrowing of the BCRP-Fed rate differential. The next monthly monetary policy meeting is scheduled for October 10.