In the first meeting of the year, the Central Bank of Peru (BCRP) cut its policy rate by 25-bp to 6.50%, 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 five consecutive meetings, taking the total amount of cuts to 125-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.
The central bank noted that annual core inflation stood at 2.9% in December, in the central bank's target of 2+/-1%. While annual headline inflation is expected to reach the target range in the coming months according to the communique, it noted upside risks associated to harsh weather conditions (referring to the El Niño phenomenon). Analysts surveyed by the BCRP in December expected one-year ahead inflation at 2.83% (from 3.15% in November), taking the real ex-ante policy rate to 3.67% up from the previous month of 3.6% and above the neutral real rate of 2.0%.
Lower inflation amid weak activity should lead the central bank to continue easing monetary policy at the current 25-bp monthly pace in 1H24, from the current level of 6.50% down to 5% by July-2024, and staying at that level through yearend. The fact that the real ex-ante policy rate increased slightly despite an additional adjustment to the nominal policy rate also supports further rate cuts.