Peru | New rate cut, but there will be pauses in the rest of the normalisation process

Without major surprise, in May the Central Bank cut once again its policy rate by 25bp, bringing it to 5,75%. We estimate that from now on the monetary normalisation process will unfold more gradually, closely following the behaviour of core inflation and the foreign exchange.

Key points

• Key points:
• The decision is in line with what we were considering in our base scenario and also with what most of the analysts surveyed by Bloomberg expected.
• The context for a rate cut was appropriate since inflation dropped significantly in April and FX pressures are, at least for the moment, contained.
• With this rate cut, the real policy rate also went down, from 3,44% to 3,13%. The monetary stance, however, is still tight.
• In our opinion, the statement released together with today's decision shows that the Central Bank is more confident that inflation will soon consolidate around the centre of the target range. However, we also believe that it suggests the possibility of pauses in the rate normalisation path, since it now highlights that from now on core inflation will be closely watched, which according to our estimates will move down relatively slowly, especially in the short term.
• In our base scenario, the rate cuts process will continue in the coming months, but with some pauses, which will respond to the behaviour of both core inflation and the foreign exchange, the latter depending, for example, on markets’ expectation about the Fed’s own monetary policy. We anticipate that the Peruvian policy rate will end the year at around 5,0%.

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