In its March meeting, the Central Bank of Peru (BCRP) maintained the policy rate at 4.75%. The decision was in line with our call and with the Bloomberg median, although a sizable share called for a 25bp cut. The statement mentions that the external scenario has become more challenging over the last months, due to a moderation in inflation convergence to the target in some economies, and uncertainty about the impact of potential trade policies. In addition, the statement highlights that Peru's activity has improved in recent months, growing around its potential. The BCRP reiterated the data-dependent guidance, keeping the door open for further rate adjustments depending on inflation (emphasizing the core index) and its determinants, inflation expectations, and activity.
Headline inflation has been within the target range (2+/-1%) for eleven consecutive months, and core inflation has been in the range since August. Headline and core inflation stood at 1.48% and 2.1% in February, respectively. The central bank expects annual inflation to approach the lower limit of the target range in March and then return to the midpoint of the target. Twelve-month inflation expectations fell to 2.28% in February, from 2.37% in January, which would take the one year real ex-ante rate at 2.47%, edging closer to the 2.0% neutral real rate.
Our take: Our forecast considers the BCRP on hold at 4.75% through 2025. While the recovery of economic activity seems to be biased to the upside, downward inflation surprises and well-behaved inflation expectations pose risks that the BCRP may deliver an additional 25 bps cut to 4.5% later this year. The next monthly monetary policy meeting is scheduled for April 10.
