PERU – Monetary policy: a hawkish start to the easing cycle

In its September meeting, the Central Bank of Peru (BCRP) cut its policy rate by 25-bp to 7.50%, in line with our forecast and market expectations (as per Bloomberg). The statement emphasized that the decision does not necessarily imply further consecutive rate cuts. Future rate adjustments will be dependent on inflation evolution and its determinants.

While the central bank expects annual inflation to reach the ceiling of the 1-3% inflation target at the beginning of next year, the central bank noted upside risks associated to harsh weather conditions (referring to the El Niño phenomenon).  Analysts surveyed by the BCRP in August expected one-year ahead inflation at 3.36% (down from 3.57% in July), taking the real ex-ante policy rate to 4.14%, still above the neutral real rate of 1.5%.  In our view, the central bank also had a dovish tone on activity, noting social conflicts and El Niño phenomenon had a larger than expected impact on internal demand.

A soft recovery of activity in 2H23 and lower inflation ahead will likely lead the central bank to continue cutting its policy rate at the same pace of 25-bp during the last three meetings of the year.  Our end of year policy rate forecast stands at 6.75%.