Peru central bank expected to hold rates at 4.50%, BofA forecasts

Bank of America forecasts the Central Bank of Peru (BCRP) will maintain its monetary policy rate at 4.50% on August 14, noting the current rate is near the BCRP's estimated neutral rate when adjusted for inflation expectations. This outlook stands in contrast to market expectations, which are pricing in approximately 52 basis points of cumulative rate cuts over the next six months. BofA anticipates the BCRP will likely remain on hold until the Federal Reserve initiates rate cuts, with earlier action only considered if Peruvian inflation falls significantly below the 2% target or if the economy experiences a meaningful slowdown.

Analysis

Bank of America (BofA) projects that the Central Bank of Peru (BCRP) will maintain its monetary policy rate at 4.50% during its upcoming meeting on August 14. The basis for this forecast is that the current rate, when adjusted for twelve-month inflation expectations, is closely aligned with the BCRP's own estimate of a neutral rate. This analyst view presents a significant disconnect with market sentiment, which is currently pricing in approximately 52 basis points of cumulative rate cuts over the next six months. BofA's outlook suggests the BCRP will likely remain on hold until the U.S. Federal Reserve initiates its own rate-cutting cycle, indicating a dependency on U.S. monetary policy shifts. According to BofA, the conditions for a preemptive rate cut by Peru would be a fall in inflation significantly below the 2% target or a material slowdown in the domestic economy.

Key Decisions for Investors

• Given the divergence between BofA's 'on hold' forecast and the market's pricing of 52 basis points in cuts, investors could consider positions that benefit from Peruvian interest rates remaining higher for longer than expected.
• A hawkish hold by the BCRP, contrary to market expectations, would likely be supportive for the Peruvian Sol (PEN), potentially making long PEN positions or carry trades more attractive against currencies with dovish central banks.
• Investors should closely monitor incoming Peruvian inflation data relative to the 2% target and key economic growth indicators, as these are the primary catalysts that could trigger a rate cut ahead of any action by the U.S. Federal Reserve.