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JPMorgan on Peru CPI/BCRP: Expect 50bp Hikes Next Week And December

PERU
  • Following the October upside CPI surprise, JPM revise December 2021 headline inflation higher, to 5.4%, while maintaining Dec 2002 inflation at 3.7%oya. They now extend the forecast horizon through 2023, and expect headline inflation to converge to 3%.
  • In terms of monetary policy, the question is whether the BCRP is to accelerate the monetary tightening pace next week, or maintain a 50bp pace as in the past month. The fact the Sol has gained a bit trading now a tad below the 4 level, together with the increase in reserve requirements announced last week (to 5.0% by January 2022, from 4.5%) and the persistent uncertainty on private sector capex stemming from political risk, may argue in favor of holding to a stable 50bp tightening pace.
  • The BCRP still enjoys the luxury of meeting every four weeks, which gives the Board more flexibility to reassess its policies than peers that host eight policy meetings per year. That said, they will put attention on the next 12-m inflation expectations survey. Another leap higher may force the BCRP hand into 75bp hike.
  • In all, JPM hold to base case for 50bp policy rate hike next week. But the inflation surprise should drive the Board to add another 50bp in December, so for the policy rate to close the year at 2.5%. If correct, the policy rate would close the year 25bp above the pre-Covid level. For 2022, they expect the policy rate to reach 4%, driving the ex-post and ex-ante real rates close to the 2011-19 average level.

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