- Peru: The BCRP’s dilemma: to cut or still hold
PERU: THE BCRP’S DILEMMA: TO CUT OR STILL HOLD
It is a difficult decision. The signals provided in the BCRP’s August statement and data support the start of the interest rate cutting cycle. However, the visible impact of El Niño on the prices of some foods and the increase in its probability of occurrence weaken this conviction. We believe the BCRP will err on the side of caution and maintain the key rate once again at 7.75% in its decision this Thursday, September 14th, although with a 55%/45% probability that still leaves a rate cut very much on the table.
The dilemma is between what the central bank should do and what it will ultimately do. The Bloomberg survey seems to weigh the first point more, as the majority favours a cut of 25bps, to 7.50%. We would also be in that camp, but we do not see the BCRP convinced of starting the interest rate cut cycle, providing signals that it is in no hurry.
If the reference rate remains at 7.75%, the real rate would rise from 4.2% to 4.4%, a record since Peru adopted the inflation targeting scheme in 2002, further tightening financial conditions in an increasingly weak economy. Despite this, in comparative terms Peru still has the lowest real rate among the countries of the Pacific Alliance plus Brazil, giving officials some flexibility regarding cuts timing when compared to the rest.
The impacts and the greater probability of occurrence of a strong El Niño scenario seem to be decisive in evaluating monetary policy decisions month by month, because although they are supply shocks, they could fuel inflation in the first months of 2024 and leave the BCRP offside. On repeated occasions, the governor of the BCRP has indicated that the worst mistake of a central bank would be to reduce the interest rate and then raise it again. Twelve-month inflation expectations fell from 3.4% to 3.3% in the latest reading, although the economic growth outlook was also trimmed from 1.3% to 1.0% for this year. The MoF incorporated a moderate El Niño scenario into its forecast for next year’s budget, and we expect something similar from the BCRP in the release of the forecast report this Friday.
—Mario Guerrero
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