In its February meeting, the Central Bank of Peru (BCRP) cut its policy rate by 25-bp to 6.25%, in line with our forecast and market expectations (as per Bloomberg). Including today's decision, the BCRP has cut at a 25-bps pace for the past six consecutive meetings, taking the total amount of cuts to 150-bps. No changes were made in the forward guidance, noting the decision does not necessarily imply further consecutive rate cuts. Future rate adjustments will be dependent on inflation and its determinants.
Twelve-month inflation expectations continued to trend down, remaining inside the target range of 2%+-1% for the second consecutive month. Analysts surveyed by the BCRP in January expected one-year ahead inflation at 2.64% (from 2.83% in December), taking the real ex-ante policy rate to 3.61%, from 3.67% in the previous month, still above the neutral rate level of 2.0%. While the El Niño phenomenon remains an upside risk to inflation, the BCRP acknowledged this risk has moderated. Regarding activity, the statement noted leading indicators suggest a recovery, although they remain in pessimistic territory.
We expect the BCRP to continue cutting its policy rate amid falling inflation and still soft activity. Our end of year policy rate forecast stands at 5.00%, which implies the BCRP cutting its policy rate in the next five months by 25-bps and staying at that level through yearend.