The final rate cut of the cycle.
The Central Bank of Peru (BCRP) decided to cut the reference rate by 25-bps, to 2.75%, in line with our forecast and median market expectations (only 4 out of 18 firms expected no action, as per Bloomberg). The rate cut came in the context of low inflation, disappointing activity in 4Q17, and heightened political uncertainty. Annual headline inflation fell to 1.2% in February (from 1.3% in January) – approaching the lower bound of the 1pp tolerance range around the 2% target – and incoming activity data points to modest growth of the GDP proxy in January (including a deterioration of business confidence indicators, as per the BCRP’s last expectations survey).
The statement only features minor changes, and keeps the easing bias. The board highlights that it expects headline inflation to fall below 1% in March, although this was already known from Chairman Velarde’s remarks to the press (who argued that this fall will be attributable to a base effect associated to food prices). Moreover, the statement mentions that both 12-month inflation and core inflation (“inflationary trend”) measures continued decreasing. On activity, the board considers that GDP is expanding below potential and notes the recent deterioration of business confidence.
We believe the easing cycle concluded in March. By cutting 25-bps in March, the BCRP accumulated 100 bps of cuts over the past 11 months. The monetary policy stance is expansionary, considering that the ex-ante real interest rate is now standing at 0.6% (below the 1.8% neutral level estimated by the BCRP). Granted, low inflation provides the board with the freedom to cut rates further – should the economic outlook worsen – but this is not our base case. In fact, we see GDP growth picking up to 4% in 2018 (from 2.5% in 2017) on the back of the increase of metal prices and macro policy stimulus (mainly fiscal, but also monetary), and inflation moving up to 2.2% by the end of the year.