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JPMorgan on BCRP: Expect Policy Rate To Climb To 4.25% By H2'22

PERU
  • With one-year-ahead expected inflation at 3.61% oya and upon the 50bp hike, the ex-ante real policy rate narrowed by 53bp though remains in negative territory, just returning to levels as of December 2020.
  • A key factor behind the realized and expected inflation acceleration observed in 2H21 has been the exchange rate dynamic, with the local currency undershooting on heightened risk and uncertainty associated with the political and institutional agenda of the Castillo administration. Yet, the turn for a more moderate agenda by the beginning of October, as well as the administration's inability to deliver in its first 100 days, has helped the currency to recover a bit of the lost ground (around 3% from the October lows).
  • The Sol's mild gains have helped to stabilize inflation expectations (-3bp on the month), thus providing BCRP with space to continue with the gradual tightening strategy.
  • That said, the monetary impulse reduction must continue so to anchor back expectation within the range. JPM keep as base case the monetary policy rate closing 2021 at 2.5%, while inflation inertia should force the BCRP to visit contractionary terrain in 2H22. JPM expect the policy rate to climb to 4.25% by 2H22.

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