MNI Peru CB Preview – Jul 25: Cautious Hold Seen, Risk Of Cut

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Executive Summary

• A majority of analysts expect the BCRP to keep its policy rate unchanged at 4.50%, although risks are skewed towards the possibility of a renewed cut following benign inflation data.
• Last month, the central bank stayed on hold, while keeping the door open to further easing, amid uncertainty about the external backdrop.
• With the policy rate already near neutral and attention on the US rate differential, the BCRP has limited room to manoeuvre and may maintain a cautious stance at this juncture.

Amid expectations of lower mining output, BCRP Governor Velarde said recently that the central bank now sees the economy growing by 3.1% this year (vs. 3.2% previously), still around potential. Meanwhile, the government now expects GDP growth to be in a 3.0-3.5% range this year (vs. 3.5% previously), reflecting concerns about the fiscal position. Earlier this month, Finance Minister Perez-Reyes said that the rigid fiscal target risked slowing the economy and that he believed the country’s fiscal rule is too strict given current world conditions. He admitted that the government was worried about the fiscal deficit, which he said will hit 2.5% of GDP this year, above the previous 2.2% forecast. 

Fiscal concerns add to ongoing uncertainties around the tariff situation, warranting a continuation of the BCRP’s cautious stance at this juncture. The surge in copper prices following President Trump’s announcement of a 50% tariff could support PEN near-term (with USDPEN already at multi-year lows), but longer-term the negative impact on trade would have the potential to weigh on the currency.