The statement accompanying the decision by Peru’s central bank to cut interest rates left the door open for further easing. And with the incoming growth and inflation data still weak, there is a window for further rate reductions. We’ve pencilled in 50bp of cuts by year-end, taking the policy rate to 2.00%.
- The statement accompanying the decision by Peru’s central bank to cut interest rates left the door open for further easing. And with the incoming growth and inflation data still weak, there is a window for further rate reductions. We’ve pencilled in 50bp of cuts by year-end, taking the policy rate to 2.00%.
- Yesterday’s decision by the central bank to lower its policy rate by 25bp from 2.75% to 2.50% was expected by a majority of analysts polled by Bloomberg (including ourselves). A sizeable minority expected a repeat of last month’s decision to keep rates on hold.
- The accompanying statement left the door open for further easing. Admittedly, the board noted that “this decision does not necessarily imply additional reduction in the policy rate”. This is much less explicit language than that used by the central bank during the previous easing cycle that began in 2017/18.
- In those statements, the board commented that it will “consider the convenience of making additional adjustments” in the policy rate. But the board is clearly considering further reductions. Indeed the board also noted that there is a “downward bias” to inflation and growth. Our impression is that the central bank does not consider that it is starting a prolonged easing cycle.
- For our part, we think there is a window for further cuts over the remainder of the year. Inflation has surprised on the downside over the past few months, and we think lower fuel inflation will keep the headline rate low over the next few months.
- Moreover, the sol has weathered the latest turmoil in EM financial markets relatively well, weakening by just 2% against the dollar. This is unlikely to push up inflation significantly and the headline rate should remain well-below the 3.0% upper bound of the target range. (See Chart 1.)
- Furthermore, the latest economic activity has been very weak. Economic activity figures produced by the statistics office tend to have a good relationship with GDP growth. Chart 2 suggests that growth in Q2 is shaping up to be less than 1.0% y/y. That is down from almost 5.0% in Q4, and 2.3% in Q1, and would be the weakest rate of expansion since the global financial crisis.
- Although we do expect a recovery in economic activity over the next six months, it is likely to be slow going. We expect growth to average around 2.3% y/y over the second half of the year, and risks are now firmly to the downside.
- As a result, we have now pencilled in an additional 50bp of rate cuts between now and the end of the year. That would take the policy rate to 2.0%. Prior to yesterday’s decision the consensus expected interest rates to be on hold for the remainder of the year.
- Further out, we expect rates to be left on hold at 2.00% for much of next year. By that point, we expect economic activity and inflation to begin a more convincing recovery. This means that we think additional monetary easing next year is unlikely.
Chart 1: Interest Rate & Consumer Prices
Chart 2: GDP & Economic Activity
Sources: Refinitiv, Capital Economics
Sources: Bloomberg , Capital Economics
Quinn Markwith, Latin American Economist, +44 20 7808 4072, firstname.lastname@example.org