MNI INTERVIEW: BCRP Heading Towards Normalization-Macera
The Central Bank of Peru is discussing its estimates of the neutral rate of interest in order to assess how far it can ease policy, BCRP board member Diego Macera told MNI, adding that he believes the country is heading towards a monetary normalization process through next year.
“Perhaps the most important debate in monetary policy right now is where the neutral rate is. We all know that interest rates need to come down, everyone knows this — the Fed, and all the central banks in the region understand that, given the current rates, we are in a period of restrictive monetary policy. The challenge lies in moving forward," he said in an interview during the IMF autumn meetings in Washington DC.
“The problem is that once you’ve made a certain number of cuts, it’s no longer clear where you should really settle because, with the structural, fiscal, and economic changes that occurred in 2020 and 2021, you might have reasons to believe that your neutral rate is no longer the same as it was. We might not return to the post-Lehman rates, but perhaps closer to pre-Lehman,” he added, emphasizing that he was speaking for himself, not on behalf of the bank.
Last year an economists’ paper published by the central bank estimated the real neutral rate at 1.5%, which, with a 2% inflation target, implies a nominal neutral rate of 4%. However, Macera thinks it could be higher now. (See MNI INTERVIEW:Gradual Cuts Allow Lower Rates-BanRep Villamizar)
“Probably the discussions over the next few days will focus on this, how far can we reduce rates given the uncertainty of a possible shift in neutral rates?” he said.
UNCERTAIN ENVIRONMENT
Earlier this month, BCRP decided to maintain its interest rate at 5.25%, defying market expectations for a 25-basis-point reduction after cutting for two consecutive meetings. While headline inflation was below the 2% target in September, core inflation remained at 2.6%.
“What is explained in the statement is that there is still uncertainty about monetary policy moves abroad, especially regarding the Federal Reserve. It’s known that there will be cuts, but there’s no certainty about when or how much. Internationally, the geopolitical landscape is slightly more uncertain than it was a few months ago," Macera said.
“We also have to consider the remaining room for cuts in future decisions, given that we meet once a month, not every six weeks.”
Macera pointed out that if the board had proceeded with another cut in October, it would have been the third in a row.
“This is one of the points reflected in the statement. After two cuts, the board decided that a pause was the appropriate course of action. It gives us a bit more time to reevaluate towards the end of the year,” he said.
He noted that there are no major issues with headline or core inflation, and expectations are aligned.
“The question is, we don’t know how quickly we can continue lowering rates,” he said
“For now, what we have on the monetary front is a normalization process for this year and next. Beyond that, we’ll see what factors may influence us, but for now, that’s where we stand.”
CORE INFLATION
Macera emphasized that inflation expectations are within the target range.
“Speaking personally, and not as a board member, core inflation should always be the primary focus. But you also have to consider the impact of supply shocks on expectations,” he said.
The monetary policy stance will also depend on the output gap.
“Right now, our gap is close to zero. We are in neutral territory — slightly negative, but not significantly. The economy is not overheating, it’s growing close to its potential. Our latest estimates for potential growth are around 2.5% to 2.7%.”
He also pointed out that Peru will hold elections in 2026, which makes the upcoming period more complex.
“My baseline scenario, not as a central bank representative, is that we will see 2025 growth near 3%, and 2026 may be slightly lower, said Macera.