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Deutsche Bank Say BCRP Keeps Optionality Regarding Its Pace Of Easing

PERU
  • Deutsche Bank note the continued decline of inflation and disruptions to activity largely underpin the start of the cutting cycle. The board’s view on activity is consistent with Deutsche Bank’s finding that the disruptions observed since Q4 2022 have kept the economy operating with slack.
  • The optionality to pause the rate cuts complicates mapping out the precise path of the cycle. Nevertheless, Deutsche see space for the continuation of a gradual easing of monetary conditions delivered in sequential 25 bp cuts towards 6.75% by the end of this year and 4% by Q4 of next year. Insofar as inflation and inflation expectations remain on their current path, the monetary stance would remain tight —as gauged by the ex-ante and ex-post real policy rates—over the course of the loosening cycle.
  • Deutsche have been recommending holding SoB 2028 and hold on to this position. Just before the cut, BCRP repo auctions implied just about two cuts in 3M and little more in 6M – significantly less than DB’s baseline call. The CCS curve is relatively flat, while bonds look expensive vs. swaps. Altogether, the yield pick-up for duration extension is unappealing, in their view.
  • On PEN, currencies affected by larger-than-expected cuts such as CLP and PLN have been overly punished, and DB prefer to wait for better levels to re-enter PEN longs.
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