PERU: Additional Analyst Views On BCRP Rate Decision

• "I would judge around 100 basis points of cuts by the end of 2025 to be appropriate under case 2, the central case, and I expressed this view of “gradual” at the Treasury Select Committee hearing in NovemberOpens in a new window.
• However, my own view, with the probability of case 1 rising, and the risk of demand stalling, is that we could then need a more accelerated pace of rate cuts, perhaps 125 or 150 basis points in the coming year. Under this view, the economy might face adverse demand pressures potentially on many fronts, while supply is less perturbed. To me this pessimistic scenario of case 1 has been becoming a more likely scenario given recent data."

• "Illustrative rates at December 2025: case 1 path – 3.25%, case 2 path – 3.75%, case 3 path – 4.25%."
• "Illustrative rates at December 2027 (consistent with illustrative r* assumptions and inflation of 2%): case 1 path – 2.75%, case 2 path – 2.75%, case 3 path – 3.75%."

Taylor:

• "With the recent flow of data and sentiment indicators, I see signs of weakening demand and labour market softness that make case 3 less likely and cases 1 and 2 more likely. I would perhaps assign a 40-40-20 probability split across the cases 1 to 3. Incidentally, that kind of probability distribution is not far off what the Bank hears from its own surveys of market participants and what the Bank’s Agents hear from contacts when asked about the likelihood of each case. But I additionally would view the weight on case 1 rising over recent months."
• "As may be apparent from my vote in December, my view is that the risks around inflation have shifted in the last 12 months. Inflation moderated faster than expected in 2024, and aside from one-time tax shocks and various base effects which our forecasts show will push upwards on inflation in 2025, I would expect the underlying trend of inflation to remain on track towards the 2% target from now on. Thus, as my title suggests, though the road to normalisation will be bumpy, we have moved along much closer to the end point – the last half mile."