MNI BCRP Preview – Oct 25: Hold Seen As Policy Nears Neutral

Hidden PDF

Executive Summary

• The BCRP is widely expected to leave its policy rate unchanged at 4.25% this week, although latest softer-than-expected CPI inflation data still keep the door open to a possible further cut in the coming meetings.
• After delivering a 25bp reduction last month, the central bank said that the policy rate was now very close to neutral, and Governor Velarde has subsequently said that there is no need to be aggressive with rate cuts.
• With growth still around potential there is little urgency to move this week, but some analysts still see scope for one final cut later in the quarter.

Last month’s widely expected 25bp rate cut brought total easing in this cycle to 350bp and took the policy rate to its lowest level since March 2022. With one-year ahead inflation expectations currently sitting at 2.18%, the ex-ante real interest rate has fallen to 2.07%, just above the 2.0% neutral estimate. Given that the monetary policy committee emphasised this point last month - that the policy rate is now very close to neutral - and with growth continuing to hold up relatively well, there appears to be little urgency to cut again at this juncture. Nonetheless, the central bank maintains a data dependent stance, and with inflation still well below target and the Peruvian sol rising to fresh five-year highs against the dollar this month, the door to a possible final cut remains ajar.