JPMorgan on BCRP: Expect Policy Rate at 1.25% by December 2021

JPMorgan: Expect Policy Rate at 1.25% by December 2021

• The BCRP hiked 25bp aiming to prevent a de-anchoring of inflation expectations, yet the real policy rate declined again.
• Inflation expectations climbed to the ceiling of the inflation target despite a wider output gap ahead, which is characteristic of de-anchoring inflation expectations. That explains the Board decision to hike the policy rate, in a timid, yet necessary, move aiming to prevent a de-anchoring of inflation expectations.
• The question is whether 25bp are enough to stabilize expectations. JPM's answer is no. The fact is that, despite the 25bp policy rate hike, both the ex-post and ex-ante real policy rate declined deeper into negative territory. As said, 12-m inflation expectations climbed by 40bp, 15bp more than the rate change. The real ex-post policy rate declined to -3.3% 9from -3.0% a month ago), while the ex-ante to -2.5% (from -2.35%).
• JPM revise their policy rate forecast to 1.25% by December 2021 from 0.75% previously.