MNI INTERVIEW: Peru Near Neutral, No Room to Cut-BCRP's Macera

The Central Bank of Peru’s current interest rate is very close to neutral and with inflation picking up and the economy running hot it is difficult to talk about cuts, board member Diego Macera told MNI.

"The actual neutral level is unknown, but based on our estimates, 4.25% is already quite close to it. If you go too low, you would likely further stimulate an economy that already has signs of running hot and is also facing inflation from a supply shock," Macera said in an interview.

Last week, the BCRP held its policy rate at 4.25%, and noted that headline inflation rose from 2.2% in February to 3.8% in March, beyond the 1-3% target range, while the core measure increased from 2.2% to 3.7%.

"The price of oil affects us through multiple channels. We are net importers of oil. This also coincided with a more local issue, as the start of the war in Iran came alongside a disruption in a key gas pipeline," said Macera. 

A leak and a fire in a pipeline transporting gas to the capital Lima early in March prompted fuel rationing and forced some companies to halt operations as energy prices jumped before it was repaired. The effect was temporary, but clearly visible in the March data, Macera said.  (See MNI INTERVIEW: BCB To Ease Gradually As It Assesses War- Pires)

TEMPORARY EFFECT

"March’s outcome reflects not only the war, but also this local disruption, with around 15 days without the pipeline, which is by far the most important source of natural gas in Peru and accounts for close to 40% of electricity generation in the country," he noted. 

Macera sees inflation expectations remaining within the target range. "It is very difficult to think inflation will ease immediately in the coming months. We will probably remain for a few months with inflation slightly above the target range. We hope to be within range by the end of the year and closer to the center of the range, that is 2%, by 2027."

"At the same time, favorable commodity prices help the exchange rate and mitigate stronger imported inflation pressures,” he said. "We cannot do anything about commodity prices — such as soy, wheat, or soybean oil rising more than 10% — these will inevitably feed into consumer prices, especially over a longer horizon if supply constraints are not promptly solved.”

POLITICAL RISKS

He also pointed to political risks related to Peru’s elections, adding that while the creation of a Senate could in theory bring more stability to a country which has seen nine presidents in 10 years, this may not necessarily turn out to be the case.

"For the first time since 1992, we will have a Senate. In principle, this should help moderate Peru’s political volatility, as more impulsive decisions from the lower house could be tempered by the upper chamber, allowing for more time and reflection. However, much will depend on how the Senate is composed.

"Recent polls suggest that the Senate’s composition may not be as clearly pro-system or pro-institutional as initially expected, which would represent a significant risk." 

At first glance, Peru looks fiscally solid compared to the rest of Latin America and the emerging markets, with low debt and a contained fiscal deficit, but Macera pointed to worrying trends, with public spending rising sharply, especially in current expenditures and wages, driven by a more permissive Congress and an executive that has failed to rein it in.