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Scotiabank Expect BCRP To Err On Side Of Caution

PERU
  • Scotiabank have noted the signals provided in the BCRP’s August statement and data support the start of the interest rate cutting cycle. However, the visible impact of El Niño on the prices of some foods and the increase in its probability of occurrence weaken this conviction.
  • Therefore, Scotiabank believe the BCRP will err on the side of caution and maintain the key rate once again at 7.75% in its decision this week, although with a 55%/45% probability that still leaves a rate cut very much on the table.
  • If the reference rate remains at 7.75%, the real rate would rise from 4.2% to 4.4%, a record since Peru adopted the inflation targeting scheme in 2002, further tightening financial conditions in an increasingly weak economy.
  • Despite this, in comparative terms Peru still has the lowest real rate among the countries of the Pacific Alliance plus Brazil, giving officials some flexibility regarding cuts timing when compared to regional peers.
  • On repeated occasions, Governor Velarde has indicated that the worst mistake of a central bank would be to reduce the interest rate and then raise it again. The MoF incorporated a moderate El Niño scenario into its forecast for next year’s budget, and Scotiabank expect something similar from the BCRP in the release of the forecast report this Friday.
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