A lower inflation target for 2019 and 2020 reinforces the outlook for lower inflation results and anchored expectations.
Lower oil prices have intensified inflation pessimism in developed markets. Lower inflation likely reflects a positive supply shock and, thus, should be transitory and net positive for DM countries.
A more supportive monetary policy stance
While inflation outlook is challenging in some countries, monetary policy is turning more accommodative, amid weak growth.
Falling inflation paves the way for lower interest rates and a lower inflation target
Political uncertainty remains high, postponing the reform process. Despite this, the inflation decline allowed the authorities to set the 2019 and 2020 targets at 4.25% and 4%, respectively, compared with 4.5% currently, and leaves room for additional interest rate cuts. We left our Selic rate projection at 8.0% in 2017, but reduced that for 2018 to 7.5%.
Electoral season begins
Former president Cristina Kirchner will run for senator in the Province of Buenos Aires. GDP growth in 1Q17 was stronger and broader-based than expected. We expect the central bank to resume gradual cuts in the reference rate as the disinflation process consolidates.
Monetary tightening ends, but easing is distant
The central bank has indicated that the tightening cycle is likely over, even if the Fed continues hiking rates. Therefore, we have revised our monetary policy rate forecasts for 2017 and 2018 to 7% (from 7.25%) and 6.50% (from 6.75%), respectively
Waiting for a glimmer of hope
Activity is weak but will likely show some improvement through the remainder of the year as the mining drag subsides. More clarity on the reform agenda after the presidential elections is key for a meaningful rebound of confidence and investment.
Waiting for macro policies to help
Temporary shocks have weakened Peru’s growth prospects for 2017. However, we expect GDP growth to pick up gradually on the back of higher terms of trade, expansionary macroeconomic policies and the positive effects of market-friendly reforms.
The government has raised its fiscal deficit targets not only for this year but also for 2018. Meanwhile, the current account deficit is still high, underlying inflation measures remain sticky, and economic growth is deteriorating. In this context, the risk of a ratings downgrade has increased.
Oil: How low can it go?
Commodity prices continued to decline in June, led by energy and agricultural prices. We have reduced our year-end WTI price forecasts to USD 45/barrel (from USD 52.5/barrel), and our year-end Brent price forecasts to USD 47/barrel (from USD 54/barrel).