One More Rate Hike Ahead For Peru's BCRP  

 

  • After the Banco Central de Reserva del Perù (BCRP) hiked by 25 basis points at its September 8 meeting, from 6.50% to 6.75%, Fitch now forecasts the central bank will raise its policy rate to 7.00% by end-2022. This is up from Fitch’s previous forecast of 6.75%.
  • While this decision was in line with the Agency’s expectations, Fitch now forecasts the BCRP to hike once more at its next meeting in October, rather than ending its hiking cycle in September. Importantly, forward-looking expectations for inflation remain well above the central bank’s 1.0%-3.0% target, and Peru’s growth outlook has become more upbeat, giving the central bank room to tighten monetary policy further.
  • While inflation expectations have come in modestly in recent months, lingering supply chain issues and the ongoing Russia-Ukraine conflict will likely prevent inflation from falling more rapidly. Overall, inflation is forecasted to fall from 8.4% y-o-y in August to 7.4% by end-2022. Given that it will remain elevated, it is anticipated that the BCRP will hike further to nudge expectations closer to the inflation target.
  • Fitch now expects that the BCRP will opt to keep rates higher in 2023 to reinforce inflation's downward trend towards its inflation target. Inflation will continue to ease by end-2023 to 3.9%, as commodity prices moderate, supply chain pressures ease and base effects become more favourable, prompting the BCRP to begin to lower its policy rate.
  • However, risks to Fitch’s interest rate and inflation forecasts remain to the upside, as high inflation, a more aggressive US Federal Reserve and ongoing political uncertainty surrounding President Pedro Castillo could see the BCRP hike further.

(Source: Fitch Solutions)