Peru | Slight drop in core inflation would be insufficient for a new rate cut

Summary

The inflation rate for July was 0.24% MoM. This outcome is attributed to the increase in prices of food items such as chicken, corn, and potatoes, as well as higher transportation costs driven by the seasonal impact of national holidays and rising fuel prices. The YoY rate stood at 2.1%, within the target range of the BCRP.

Key points

• Key points:
• The component of the consumer basket that excludes food and energy, a more trend-sensitive measure of the pace at which prices are advancing, increased by 0.19% MoM in July and 3.0% YoY (June: 3.1%), positioning itself at the upper limit of the Central Bank's target range.
• We foresee that overall inflation will remain close to 2.0% in the third quarter of the year, in an environment where (i) inflation expectations are anchored, (ii) the year-over-year comparison base remains relatively favorable, and (iii) despite likely improved economic activity compared to the beginning of the year (slack in the economy persists). In the final quarter, the year-over-year comparison base will decrease, resulting in inflation closing slightly above 2.5%.
• The price environment (with inflation and inflation expectations within the target range), the still nascent recovery in activity, and the contractionary stance of monetary policy, suggest that additional cuts to the policy rate are likely in the coming months. We anticipate that the policy rate, currently at 5.75%, will end the year around 5.0%.
• However, given the local currency's continued volatility in recent weeks and, more importantly, the persistent resistance of core inflation (which excludes food and energy) to decline, we believe there is a high probability that the Central Reserve Bank of Peru (BCRP) will maintain the policy rate at 5.75% this month.

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