Economic Analysis - Quick View - Dovish Stance Will Be Tested By Persistent Inflation - 22 MAY 2017

The Latest: On May 11, the BCRP unexpectedly cut its benchmark rate by 25 basis points from 4.25% to 4.00%

Implications : The cut came against our expectations for a hold, as the BCRP shifted policy in an effort to boost economic output following major flooding and infrastructure delays. The move follows its decision to reduce capital requirements earlier this month, and will likely add to inflationary pressures. Inflation hit 3.7% y-o-y in April, well above the bank's upper tolerance band of 3.0%.

What ' s Next: Contrary to the BCRP, we expect inflation to remain above the 3% upper band for the remainder of the year, driven by rising import costs. Inflationary pressures will test the resolve of the Central Bank as it weighs its dovish policy stance against its primary objective of price stability. We will be reassessing our interest rate forecasts in the coming weeks.

Cut Comes With Inflation Well Outside Of Target Band
Peru - Central Bank Target Rate And Inflation % y-o-y
Source: BCRP, BMI

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