Market expects new Peru policy rate cut this year

Inflation in Peru continued to fall in September and the market expects a new cut in the policy rate to boost the economy given the solid macroeconomic fundamentals.

With September’s inflation coming in at negative 0.24% the 12-month figure fell from 2% in August to 1.8%, below the mid-point of the central bank’s target range of 1-3% for the first time in 44 months.

According to Scotiabank, the negative inflation last month compared to market expectations of a rise of 0.08%, while 12-month underlying inflation – which does not include food or energy prices – fell from 2.8% to 2.6%, the sixth consecutive month that it remains within the target range.

Banco de Crédito del Perú (BCP), meanwhile, said the cuts in the monetary policy rate – from 5.75% in July to 5.25% in September – have contributed to the dynamism observed in 3Q24, and there has been no impact on prices. “The indicators for September show a certain moderation: the monthly demand for electricity increased by 1.3%, the number of transactions in the [financial] system by 7.4%, real public investment by 7.4%, imports of industrial inputs by 1.6% and capital goods by 8.1%,” says a BCP report.

Scotiabank, for its part, said the economic dynamism, together with controlled macroeconomic variables and expectations, should lead the central bank to reduce its rate again.

“There are many factors that would support this decision, such as the control of general inflation, which reached a 46-month low in September, a notable moderation in core inflation, inflation expectations anchored around 2.4%, a stable exchange rate of between 3.70 and 3.75 soles [to the dollar] and the surprise decision of the Federal Reserve in September to cut its rate by 50bps. All these factors give the central bank room to continue relaxing its monetary policy,” the Canadian bank said in a report.

Although greater dynamism is expected after the rate cuts, neither bank has made any adjustments to annual GDP projections for the time being. BCP and Scotiabank both forecast GDP will grow 3% in 2024. Regarding the monetary policy rate, both entities project it will end 2024 at 5.0% but possible reductions driven by new Fed decisions are not ruled out.