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Scotiabank on Peru Inflation, Reference Rate and FX Forecasts

PERU
  • Inflationary pressures are proving stronger and more persistent than anticipated. In addition to the global pandemic, domestic uncertainty is spurring volatility, with the risk of an incipient feedback loop between inflation and PEN depreciation.
  • The BCRP needs to disrupt this loop quickly, which is why Scotiabank expect it to be much more aggressive in monetary policy, despite an economy that is still trying to get back on its feet after the 2020 COVID-19 lockdown.
  • These pressures lead Scotiabank to revise their forecasts significantly for key financial variables.
  • They are raising their inflation forecast from 3.5% to 6.5% y/y for 2021, and from 3.2% to 4.5% y/y for 2022.
  • In response to higher inflation, they now expect the BCRP to raise its reference rate from 0.50% currently to 1.25% by year-end 2021, and to 2.50 by year-end 2022 and see upside risk to those reference rate forecasts.
  • Given persistent political turbulence, and in view that the USDPEN continues to ignore external account fundamentals, they raise the FX forecast from 3.65 to 4.15 for 2021, and from 3.60 to 4.25 for 2022. Scotiabank note, however, that uncertainty is high, not only in terms of magnitude of change, but also in terms of direction, and with so many strong countervailing forces in play the risk is on the downside (PEN appreciation).
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