PERU: Analyst Views On BCRP Interest Rate Decision

Italy’s 2026 draft budget was approved by the government yesterday. As has been reported in recent weeks, the government expects the budget deficit to fall to 3% GDP in 2025. The deficit is expected to fall to 2.8% in 2026, 2.6% in 2027 and 2.3% in 2028. The 2026 deficit forecast is slightly more optimistic than current Bloomberg consensus of 3.0% and the EC’s Spring Projection round forecast of 2.9% (which of course do not yet account for the policies incorporated into the budget proposal).

• Having already tightened by ~35bps this year, the 10-year BTP/Bund spread has struggled to sustainably consolidated below 80bps in recent months. Upcoming growth data and ratings action will be key in determining whether further near-term narrowing is plausible.
• Growth: Q3 flash GDP is due on October 30. Consensus (according to Bloomberg’s ECFC page) looks for 0.1% Q/Q growth (vs -0.1% prior). We have previously noted that the main barrier to continued Italian fiscal consolidation is the country’s weak growth trajectory.   
• Ratings: Moody’s will review Italy’s rating on November 21 (current rating Baa3, Outlook Positive). Moody's rating is two notches below Fitch and S&P, so at least a one notch upgrade is expected. We still think a one notch upgrade to Baa2 while maintaining a positive outlook seems reasonable.
• Some details of the budget proposal via Politico:
  • “While ongoing discussions between the government and banks have yet to yield an agreement on what form the tax would take, the hard-right League, of which Giorgetti is a member, is seeking between €4 billion and €4.5 billion from a range of measures, according to two people familiar with the matter. The measures would also apply to insurers, one of the people said”.
  • “Major policies in the draft budget, which Italian lawmakers will study in the coming months, includes a €9 billion cut to income taxes for the Italian middle class to 33 percent from 35 percent and €2 billion to align salaries with the cost of living after years of stagnation.

  •  “The draft, which is due to be sent to the European Commission on Wednesday, also earmarks €3.5 billion for “anti-poverty measures” and €2.4 billion for health care in 2026".

    

Disagreements over policies regarding security and nuclear power appear to be the key obstacles to an agreement between opposition parties on backing a joint candidate for PM. After a meeting between the leaders of the liberal Constitutional Democratic Party (CDP), libertarian-federalist Japan Innovation Party (Ishin), and conservative populist Democratic Party for the People (DPFP), DPFP leader Yuichiro Tamaki said, "I told [CDP leader] Yoshihiko Noda that the security legislation cannot be recognised as not unconstitutional. Representative Noda said he would maintain the assertion that the security legislation has unconstitutional elements and would not reconsider zero nuclear power."

• The 2015 'Legislation for Peace and Security' saw a reinterpretation of the Japanese constitution, which allows the military to act only in self-defence. The reinterpretation saw Japan's Self-Defence Forces enabled to operate in foreign conflicts under the auspices of 'collective self-defence' for allies.
• The CDP's official policy document says the party would, "...take necessary measures such as abolishing the unconstitutional parts of the security legislation."
• On nuclear power, the document says the CDP would "Not build or expand nuclear power plants, but aim to promptly shut down and decommission all nuclear power plants."
• In contrast, the DPFP supports restarting and expanding Japan's nuclear power sector, as well as boosting investment in defence production and capabilities.
• If these policies prove unmovable red lines for both the CDP and DPFP, it would almost certainly end the prospect of a governing coalition involving the two parties, and limit the chances of them cooperating on a joint PM candidate.