MNI Peru CB Preview - Dec 25: Further Easing May Be Considered

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Executive Summary

• The BCRP interest rate decision looks like being a close call, with a slight majority of analysts leaning towards a third consecutive rate hold at 4.25%.
• Economic activity is continuing to grow around its potential rate, and the policy rate is already very close to neutral, limiting the urgency for a further cut at this juncture.
• However, the continued strength of the PEN, which is trading at multi-year highs against the dollar, presents a downside risk to the inflation outlook, even as the headline rate remains near the bottom of the 1-3% target range. As such, risks remain skewed to a further 25bp cut in the coming meetings.

Last month, the Board described the recent fall of inflation as “transitory”, saying that it still expects the headline rate to approach the midpoint of the target range in the coming months. However, latest inflation data revealed yet another downside surprise in November, with headline consumer prices rising by just 0.11% m/m last month. This kept the annual rate broadly unchanged at 1.37% y/y, marking a 12th consecutive month below the 2% target. Meanwhile, inflation expectations remain stable within the target range, sitting at 2.19% in October. With the policy rate at 4.25%, this leaves the ex-ante real rate at 2.06%, just above the 2.0% neutral estimate.