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JPMorgan on PERU - While waiting for the official runoff proclamation, BCRP's Q2 Inflation Report prompts JPM to revise main macro forecasts:
- While acknowledging many uncertainties, revisions to growth and particularly inflation are based on the assumption of an ordered regime change ahead if Castillo is finally proclaimed as president elect.
- Uncertain waiting period following the runoff, as well as the doubts surrounding an eventual Castillo administration agenda, has already hit investment prospects for 2Q21 and will likely spill over to 3Q21, unlikely to be compensated by public sector capex. They shave 2021 and 2022 GDP growth to 10.8%y/y and 4.1%, respectively.
- Admittedly, the messages from the Castillo campaign team have been aligned to the merits of respecting the BCRP autonomy and maintaining the inflation target regime. But policy uncertainty associated with potential variations in the CB policy reaction function are to prevail ahead, which they deem consistent with a permanently weaker currency, and thus higher imported and tradable inflationary pressures.
- Note the real ex-ante policy rate is likely to go deeper into negative territory, as their models suggest an additional 70bp impulse to headline inflation, stemming from a weaker currency associated with an ordered regime change. The models show about 33bp in tradable inflation in the pipeline through end-May, to which JPM add another 37bp on FX passthrough until year-end. They update their 2021 inflation forecast to 2.9%oya, from 2.2% previously.