MNI Peru CB Preview – Sep 25: Benign CPI Skews Risk To Cut

Download Full Report Here

Executive Summary

• A narrow majority of analysts expect a 25bp policy rate cut to 4.25% this week, after the sharp fall of headline CPI inflation in August looks to have opened the door to a near-term resumption of the easing cycle.
• Although the BCRP is mindful of the narrow rate differential with the US, the benign inflation backdrop – with headline inflation at a seven-year low and core still below the 2% target – and resilient PEN looks to skew risks towards the possibility of a renewed cut.
• In the absence of a cut, the forward guidance is likely to keep the door open to further easing ahead, with most analysts expecting a move before year end.

Inflation data have surprised notably to the downside since the last MPC meeting. In August, headline consumer prices fell by 0.29% m/m, well below the +0.17% consensus on Bloomberg, which brought the annual rate of inflation down to a seven-year low of 1.11% y/y, just above the bottom of the central bank’s 1-3% target range. The sharp fall was driven by a decline in the food and transport components, while core inflation edged higher. Excluding food and energy, core CPI inflation rose to 1.76% y/y, from 1.68%. 

Nonetheless, core inflation remains comfortably below the 2% target and close to recent four-year lows. While inflation is expected to edge up through the remained of the year on base effects, it looks set to end the year close to target. Importantly, inflation expectations remain well anchored, with analysts’ one-year ahead expectations falling at a four-year low of 2.19% in July.