Peru. Policy rate on hold, but with a more dovish bias

Summary

The Central Bank decided to keep the policy rate at 3,50 % in November, in line with both our and consensus expectations. In contrast to last month’s press release, this time there was no mention of signs of a recovery in economic growth and instead it added that the recent inflation uptick is due to transitory supply factors. We understand this as being consistent with our view: that the CB’s current easing stance is likely to be intensified soon, perhaps as early as December. Support for this view is found in a strongly negative output gap, a rebound in GDP growth that would be less pronounced than what the authorities are expecting, and a more benign 2015 inflation outlook. Nonetheless, the room for further easing is limited because if it is aggressive it could feed depreciation pressures on the local currency and in that way damage the balance sheets of firms and households with currency mismatches.

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