In its July meeting, the Central Bank of Peru (BCRP) kept its policy rate unchanged at 5.75%, in line market expectations, but above our call of 5.50%. This is the third pause in the year (second consecutive). The statement kept the doors open for further rate adjustments depending on inflation (emphasizing the core index) and its determinants. The central bank kept its reserve requirement rate unchanged at 5.50%.
The BCRP extended the pause despite headline inflation inside the target range (2+/-1%) for third consecutive month although with core inflation slightly above the upper bound target. Headline and core inflation stood at 2.3% and 3.1% in June, respectively. The central bank expects annual inflation to remain around the central target. Twelve-month inflation expectations fell further to 2.53% in June (from 2.56% in May) taking the real ex-ante rate to 3.22% (previously 3.19%), above the neutral rate of 2.0%.
Our take: We expect the central bank to continue easing its monetary policy rate during the rest of the year amid well-behaved headline inflation and below trend activity. Higher odds of the Fed starting its easing cycle in 3Q24 also supports our call, reducing concerns of the narrowing of the BCRP-Fed rate differential. Our end of year policy rate forecast is at 5.00%, which implies three more rate cuts of 25-bp during the rest of the year. The timing of other rate cuts will be dependent on improvements in core inflation readings.