In its May meeting, the Central Bank of Peru (BCRP) cut its policy rate by 25-bp (reaching a level of 5.75% and accumulating 200-bp in cuts since August 2023), in line with our forecast and market consensus (as per Bloomberg). The central bank kept its reserve requirement rate unchanged at 5.50%. The statement did not close the doors for additional rate adjustments, noting that it will depend on inflation and its determinants. The BCRP noted that inflation is inside the target range of 2+/-1%, while 12-month inflation expectations remained practically unchanged at 2.6%, also inside the target range, for second consecutive month. As a result, the real ex-ante rate stood at 3.13%, still above the neutral rate of 2.0%. The central bank acknowledged a still fragile activity recovery, noting that April’s leading indicators deteriorated slightly. Finally, the communique noted that risks associated to the start of the easing cycle persist.
Our take: Well behaved inflation amid a fragile activity recovery suggests there is still room for the BCRP to continue easing. However, increased uncertainty regarding the start of the Fed's easing cycle considering the narrowing of the BCRP-Fed rate differential limits how low the policy rate can go in the short term. Our base case is for the BCRP to keep the policy rate unchanged during the rest of year, relying on lowering the reserve requirement rate to ease financial conditions, instead. Still, we cannot rule out an additional policy rate reduction this year (risking pressure on the currency) if inflation surprises further to the downside.