Morgan Stanley on BCRP: A New Hawk Emerges

Morgan Stanley: A New Hawk Emerges

• The BCRP's decision to hike rates by 25bp, to 0.50%, should provide some support for PEN in the near term as markets should begin to price in a more hawkish BCRP in the coming months.
• This should also support some flattening in local rates, though this would likely be more front-end-driven, with the long end potential seeing some benefits in regards to the anchoring of long-run inflation expectations.
• Still, political headline risk remains elevated, suggesting that uncertainty remains in the medium term as to whether a hawkish but still expansionary BCRP policy stance will be enough to stem currency depreciation or just slow it, offsetting some of the volatility.
• MS are changing their policy rate forecasts to 1.25% in 2021 (from 0.75% previously) and 2.50% in 2022 (from 2.00% previously). This includes a 25bp hike in the next meeting in September. Looking ahead, MS expect market participants - including themselves - to maintain a key focus on inflationary pressures arising mainly from food inflation and fuel prices, resulting from higher commodity prices, and their second-round effects, impacting inflation expectations. On top of that, important to follow the FX behaviour and its reaction to the political headline risk.
• For now, they maintain their more neutral stance on local assets.