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Pantheon Believe There Is A Window Of Opportunity To Cut Rates

PERU
  • Pantheon expect the BCRP to cut the main interest rate by 25bp to 7.50%. Policymakers surprised markets with the start of easing in the last three cycles; they take action speedily when conditions allow. Inflation is falling rapidly, particularly the core component, and economic activity is under severe strain. However, Pantheon do admit that policymakers could delay the start of the easing cycle until next month, given increased upside threats to inflation, particularly El Niño.
  • Pantheon expect headline inflation to fall to about 4.5% in September and 3.5% by the end of the year. If they are right, BCRP could cut rates to about 6.5% by year-end. But, again, risks to inflation continue to be skewed to the upside. Rising oil prices and the EM currency sell-off in recent days have highlighted the threat. Higher global risk, increasing U.S. yields and relatively upbeat U.S. job market data, which support the USD, have put even the PEN—a low-volatility currency—under strain.
  • The start of the easing cycle in Brazil and Chile is also driving market volatility. Pantheon expect conditions to stabilise in the coming weeks, but risks remain. In other words, it’s better for the BCRP to start the easing cycle now there is a relatively decent window of opportunity, as conditions could soon turn difficult for Peru and other EM.
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