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Santander: Receding El Niño Risk Bode Well For Easier Policy

PERU
  • Santander expect the BCRP to continue its current gradual easing cycle in 2024, extending the 25bps pace of easing at the next few meetings. The recent mix of soft economic data – both onshore activity and inflation – provides ongoing validation to the current steady-handed approach. Santander’s baseline is for this strategy to continue through Q1, though conviction will hinge on the severity (and timing) of El Niño, of which the assessment has eased in recent weeks.
  • Once we move past El Niño risks, the case for a more aggressive policy easing phase could build given the weakness in domestic growth momentum and high real rates setting. Currently, Peru’s ex-ante real policy rate of 3.6% is just under double the estimated neutral rate of 2% (note this was revised up from 1.5% by the central bank in September’s Inflation Report) and remains at the most restrictive level since 2008.
  • With the weak economic backdrop pointing to a widening (negative) output gap in 2024, the case for a more aggressive easing profile likely strengthens once the aforementioned El Niño risks are better observed (likely after Q1). Santander’s current terminal policy rate projection of 4.0% reflects this likely scenario and remains somewhat off-consensus (more dovish) vs current market expectations.
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