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Our end of year policy rate forecast of 5.00% has an upward bias.
2024/03/08 | Andrés Pérez M. & Julio Ruiz

In its March meeting, the Central Bank of Peru (BCRP) paused its monetary easing cycle (leaving the policy rate unchanged at 6.25%), above our forecast and market consensus - both at 6.00%. The statement's forward guidance noted that additional rate adjustments will be dependent on inflation evolution and its determinants. 

The statement's neutral to dovish tone on inflation and activity seems to be supporting additional rate cuts, but the narrowing of the rate differential which has been pressuring the currency recently could explain the surprise decision, in our view (although there is no explicit mention about it). The BCRP seems to downplay the recent rebound in annual inflation in February (3.3%, from 3.0% in January) as it was labelled as transitory in the statement, while it continues to mention that upside risks to inflation from the El Niño phenomenon have receded. Likewise, the statement recognized that activity leading indicators remain in pessimistic territory (although they are recovering). Twelve-month inflation expectations stood practically unchanged at 2.65% with the real ex-ante policy rate 3.6%, also practically unchanged from the previous month and above the neutral rate of 2.0%. 

We think that the main reason behind the pause in the easing cycle could be associated to currency depreciation given the narrowing of the rate differentials and the expectation of a delayed start of the Fed easing cycle. Our end of year policy rate forecast of 5.00% has an upward bias.