Peru Economic Outlook. March 2024

Summary

Economic activity will rebound this year as the negative shocks that affected it in 2023 revert and the environment for private sector spending improves. Output is expected to grow 2,7%, higher than our three-months-ago forecast (2,0%), as weather anomalies related to the coastal El Niño phenomenon have been less intense.

Key points

• Key points:
• Economic growth in the U.S. will slow down, though less than forecasted three months ago, while in the Eurozone and China it will remain relatively weak. In this context, inflation will continue to move down, giving the Fed and the ECB room to begin rate cuts in mid-2024.
• The rebound in domestic economic activity will add support to fiscal revenues and the deficit will thus subside, reaching 2,3% of GDP in 2024. Fiscal policy efforts will henceforth be aimed at consolidating public finances, reducing the deficit and bringing it closer to the targets. This will leave the task of supporting economic activity recovery in the short term to monetary policy.
• As monetary policy easing moves faster in Peru than in the U.S., the PEN is expected to weaken in the remainder of the year, although this will be capped by the current account balance surplus. We estimate that the USDPEN will close the year in a range between 3,85 and 3,95 soles per dollar. In 2025, with the interest rate differential recovering, the foreign exchange will end between 3,70 and 3,80.
• Inflation, currently at 3,3%, will decrease in the coming months as the impacts of the coastal El Niño phenomenon subside and base effects kick-in. It will end the year around 2,6%, while in 2025 it will close around 2,4%.
• The monetary policy rate, currently at 6,25%, will continue to be lowered in the coming months. With expected inflation already within the target range, these rate cuts will likely be more clearly reflected in the monetary policy stance. This means each cut could be of limited size, as has been the case so far, which would prevent exacerbating pressures on the foreign exchange. In this scenario, the policy rate is expected to end the year at 4,25%, remaining at that level in 2025.

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