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Morgan Stanley on Peru Following BCRP Decision

PERU
  • Morgan Stanley expect an additional 75-80bp of local curve flattening in 2s10s as the BCRP heads towards their economists' expected terminal rate of 6.00%. MS continue to prefer being OW PeruGB August 2032s vs. UW PeruGB August 2024s.
  • For now, elevated political uncertainty is already reflected in the shape of the curve as Peru has one of the steepest local curves in EM. As a result, MS see limited room for additional steepening off the back of recent political headlines, leaving BCRP policy as the key driver of the shape of the curve.
  • The currency is likely to take most of the pressure from near-term political risk as idiosyncratic risk premia in the currency remain very negative. In addition, inflation expectations this month increased at a faster pace than the BCRP policy rate, driving the ex-ante real policy rates lower from 0.25% at the beginning of March to 0.11% in April, despite the 50bp hike this meeting. A 75bp hike would have been required to keep ex-ante real policy rates steady or slightly higher.
  • For now, the negative output gap appears to be limiting the speed at which the BCRP is comfortable hiking rates. This is likely to weigh on currency performance, especially if inflation expectations continue to rise at a faster pace than 50bp. Add to this the near-term political uncertainty.
  • The evolution of geopolitical tensions and inflationary dynamics remain in focus. MS believe that pressure on core items will continue, due to the second-round effects from the persistent high headline inflation, especially after the recent commodity shock. Despite the recent increase in inflationary pressures, MS don’t think the BCRP will accelerate the pace at this moment.
  • Additionally, the evolution of the noise in the political arena as well as monetary policy actions in the developed economies will be monitored.
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