Peru will be the next country to join Latin America’s cycle of interest rate cuts after policymakers changed their guidance and highlighted a significant slowdown in inflation, according to Wall Street bank economists.
(Bloomberg) — Peru will be the next country to join Latin America’s cycle of interest rate cuts after policymakers changed their guidance and highlighted a significant slowdown in inflation, according to Wall Street bank economists.
Analysts at institutions including Goldman Sachs Group Inc. and JPMorgan Chase & Co. expect Peru’s central bank to start lowering borrowing costs in September after its board removed a reference to chances of more tightening from its post rate-decision statement late Thursday.
“We assess that the policy signals indicate that MPC is ready to embark on a cutting cycle soon,” Goldman Sachs economist Santiago Tellez wrote in a note Friday. “Headline inflation still enjoys favorable base effects, and core pressures remain subdued on the back of a negative output gap and weak activity data.”
Peru stands to join Brazil, Chile and Uruguay, all of which have already started to relax monetary policy as a post-pandemic inflation surge wanes. Central bankers led by Julio Velarde left borrowing costs unchanged at 7.75% for a seventh-straight month late Thursday. The board sees cost-of-living increases nearing the upper part of its target band by year’s end.
What Bloomberg Economics Says
“Changes to the Peruvian central bank’s policy statement released after Thursday’s meeting confirm the tightening cycle is over. That shift, inflation decelerating more quickly than the BCRP anticipated, weaker activity than policymakers projected and tight monetary conditions open the door to rate cuts.”
— Felipe Hernandez, Latin America economist
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Annual inflation eased to 5.88% in July from 6.46% a month earlier, above the target band of 1%-3%. Until now, Velarde has repeatedly warned he’s wary of cutting rates too soon out of fear that price pressures may bounce back.
“We think the central bank has left everything ready to start the process of cutting rates as early as September,” analysts at Banco Bilbao Vizcaya Argentaria SA wrote in a note. Meanwhile, Credicorp Ltd expects as much as a full percentage point in borrowing cost reductions by year’s end, following a start to easing in either September or October.
Read More: Peru Holds Rate at 7.75% as Inflation Remains Above Target
Elsewhere in the region, Mexico and Colombia are seen starting rate cuts between the end of this year and start of 2024. By contrast, central banks in developed economies such as the US and UK recently tightened monetary policy.
–With assistance from Maria Elena Vizcaino.
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