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Morgan Stanley Revise Peru Policy Rate Forecasts

PERU
  • Morgan Stanley have changed their end-2022 policy rate forecast to 5.00% (from 4.00% previously) and end-2023 to 5.00% (from 4.00% previously).
  • They now expect 50bp hikes in Feb, Mar and Apr as yearly inflation should remain at high levels – above 5.5% until April. They expect the BCRP to hike 25bp at two more meetings throughout 2022 until rates reach 5.00%, when real rates ex-ante (rates minus inflation expectations 12 months ahead) would be on the contractionary side.
  • This could keep pushing continued flattening in the local curve as the market prices additional rate hikes into the local bond curve. With their projected terminal policy rate now closer to 5.00%, MS expect the 2s10s curve in Soberanos to trade flatter from roughly 200bp to at least 150bp for now, with spreads towards the peak of the policy cycle reaching closer to 100bp. This doesn’t take into account the possibility of further US 10y term premia inversion amid more hawkish Fed policy action, which could further catalyze the move.
  • In FX, the currency performance has improved, though continued improvement will be dictated largely by policy action by the BCRP, while PEN USD beta, although positive, remains below 0.4 and PEN idiosyncratic risk premia is now closer to zero or fair value.
  • Three things to monitor going forward include CPI prints and inflation expectations, the evolution of the new Covid variant and the behaviour of the currency.
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