Analyst Views Following BCRP Rate Decision

BCRP - Analyst Views:

• **Morgan Stanley: With inflation at multi decade highs, the slow normalization of the real policy rate has done little to subdue the pace of increase of 12m ahead expectations of roughly 29bp over the last 3 months. This has left the ex-ante real policy rate as the lowest in the LatAm region.
  • This in combination with a large increase in FX Swap maturities during the summer should weigh on FX performance in the coming months.
    • In local rates, despite higher rates, 2s10s remained close to 180bp the last three months, suggesting changes in the curve have been largely level driven. For now, the curve remains steep on an excess term premia basis. The terminal rates of 7.00% expected by our economist should bring the 2s10s curve from 175bp to at least 100bp, suggesting 75bp of flattening.
• **BBVA expect the year-on-year inflation rate to be close to peaking, and the decline over the second semester will be gradual, which will close the year at around 6.0%. In addition, BBVA anticipate that the Bank Central will continue raising the reference rate until reaching a maximum of 6.50% in the rest of the year.
  • This projection assumes that inflation expectations remain around the current level (possibly with a slight additional upward adjustment) and that the monetary policy stance will converge to a neutral level.
  • The Central Bank estimates that the neutral monetary policy interest rate in real terms is 1.50% and currently stands at 0.6%, so with inflation expectations around 4.9%, this would give room for increases of up to an additional 100 basis points from the level that has been decided today of 5.50%.