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Morgan Stanley on BCRP: 50bp Hikes Through Year-End

PERU
  • MS economists expect the BCRP to deliver a 50bp hike to 2.00% in line with what the market is pricing via the implied forward yield in USD/PEN.
  • This comes on the back of higher headline inflation, pushed mainly by food inflation, fuel prices and, in the month of October, home prices. However, these pressures on non-core items have been translating into higher core measures (currently at 2.8% Y/y, close to the 3%Y/y upper limit of the band), evidencing second-round effects.
  • On top of that, inflation expectations remain at 3.61% Y/y (up from 3.1% Y/y in August), showing only a slight moderation from 3.64% Y/y in September. In response to the deterioration in inflation dynamics, MS expect the central bank to keep the current hiking pace of 50bp, despite not committing to hikes in consecutive meetings.
  • Continued hikes of 50bp through year-end, should continue to provide an additional flattening bias to the Soberanos curve. The recent approval of the cabinet and rhetoric from the administration prioritising governability provide a continued signalling of moderation, and this should support local markets in the near term.
  • Their quantitative models suggest that PEN valuations look fairly cheap compared to the rest of EM, and believe the sol could continue to outperform other metal exporters.

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