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Bank of America See Conditions Aligning For Faster Easing Cycle

PERU
  • Bank of America expect the BCRP to cut the policy rate by 25bp, to 6.50% this week. The significant decline of inflation, a milder El Niño, depressed activity, and more benign external conditions provide space to continue cutting rates. BofA now believe the BCRP will cut 25bp in every meeting until reaching 4% (down from the expectation of a pause and a terminal rate of 5% in their previous scenario).
  • On core inflation they forecast a variation of 0.01% m/m for January. Nominal exchange rate appreciation, 4.1% from October, is putting downward pressure on imported goods’ prices such as automobiles and services that are sensitive to the exchange rate (Lima’s housing rent, air tickets, regulated electricity). Moreover, the contraction of GDP has come with weak demand that is also inducing disinflation in core prices.
  • By cutting rates by 25bp in each monthly meeting until reaching 4% in November 2024, this would then imply a mildly expansionary stance, with a real ex-ante rate of 1.5%, below the neutral rate of 2%.
  • In BofA’s view the BCRP is unlikely to step up the pace of the cuts from 25bp to 50bp (or more) for four reasons: 1) in the starting point of the easing cycle rates were not really very high, unlike in LatAm peers, so the BCRP doesn’t need to rush; 2) it would be a mistake to trust El Niño predictions 100%, so it’s better to keep the guard high at least until April; 3) BCRP probably wants to avoid depreciation pressure on the exchange rate, that could happen if they signal a deeper and faster easing cycle; and 4) 12-month inflation expectations returned to the tolerance range in December, after almost three years outside.
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