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Morgan Stanley: Expectations Re-Anchoring Should Help Yields Head Lower

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  • Morgan Stanley economists expect the BCRP to keep the 25bp pace, bringing rates to 7.25%.
  • 12-month inflation expectations continue to revert (recently by 10bp to 4.78%Y), helping to drive the real policy rate (ex-ante) to its highest level on a historical basis.
  • This additional boost to the real policy rate (ex-ante), paired with the willingness of the BCRP to keep the outstanding stock of FX swaps mostly steady in addition to spot market dollar sales, should provide strong support for PEN.
    • This is in addition to already elevated levels of local dollarisation relative to peers, which suggest that sufficient domestic liquidity in dollars already exists. This removes pressure on the currency.
  • With expectations re-anchoring, we are likely to see additional benefit for local yields to head lower especially once core rates start to turn.

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  • Morgan Stanley economists expect the BCRP to keep the 25bp pace, bringing rates to 7.25%.
  • 12-month inflation expectations continue to revert (recently by 10bp to 4.78%Y), helping to drive the real policy rate (ex-ante) to its highest level on a historical basis.
  • This additional boost to the real policy rate (ex-ante), paired with the willingness of the BCRP to keep the outstanding stock of FX swaps mostly steady in addition to spot market dollar sales, should provide strong support for PEN.
    • This is in addition to already elevated levels of local dollarisation relative to peers, which suggest that sufficient domestic liquidity in dollars already exists. This removes pressure on the currency.
  • With expectations re-anchoring, we are likely to see additional benefit for local yields to head lower especially once core rates start to turn.