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Morgan Stanley on BCRP: Cautious on Inflation, Steady on Hikes

  • Fixed Income Strategy: The BCRP will have to maintain its 50bp pace of rate hikes for at least the next couple of meetings to continue combating inflation pressures, re-anchor expectations and keep the currency supported.
  • For now, inflation expectations remain elevated, despite a recent downtick in January headline and core inflation. The real policy rate currently sits at -0.23%, suggesting that the upcoming decision in March, assuming no major uptick in inflation expectations, should place the real policy rate at pre-pandemic levels, close to +0.25%, the first positive real policy rate since February 2020.
  • MS expect continued policy rate hikes to keep a flattening bias in the curve. However, outright rate levels may continue to trend higher amid pressure from higher US rates, making large local rate outperformance a challenge for now.
  • On the FX side, although hikes have continued to provide some support to the currency, much of the recent outperformance in PEN has left extremely low levels of idiosyncratic risk premia imbedded, making the currency a bit more vulnerable to political headline risk.

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