Boluarte still vulnerable; economic risk rises; sticky inflation likely to delay rate cuts until November
In this forecast report, we discuss different potential scenarios for politics, the economy and the markets. In politics, we focus on the possible outcomes of the efforts of President Dina Boluarte to increase her support. We argue that, rather than developing policy to tackle the problems affecting Peruvians most acutely, such as the weak economy and internal security issues, Boluarte has instead focused on strengthening her alliance with the more radical (and highly unpopular) groups in Congress. Rather than strengthening her political position, this has kept her vulnerable. We retain our view that she may nevertheless remain in the presidency until the general elections, scheduled for July 28th, 2026.
We have revised our economic scenarios. We discuss our growth forecasts in comparison with the official forecast; and we assess the 2024 budget, which the government submitted to Congress on August 29th. Overall, we argue that our new forecasts have introduced greater downside risk, in both the low and high-case scenarios. Our forecasts are already even more pessimistic than the official ones, and we believe there is still more downside risk to add. This could result from a slower-than-expected recovery in H2 2023; the El Niño weather shock expected to affect northern Peru later in 2023; and the falling potential growth rate associated with an absence of economic reforms that would boost productivity.
Regarding the markets, we discuss when the Central Bank board may decide to cut rates. August inflation has disappointed on the high side, owing to supply-price shocks. Although, as is typical, this can be traced to a few items, there are signs of inflation contamination in core inflation (estimated excluding food and energy). The positive is that inflation expectations continue to converge with the BCRP’s 2% (+/- 1%) official inflation target, and that the BCRP’s alternative core inflation measures show limited signs of contamination. However, we believe that the BCRP Board will carefully assess the September inflation report before committing to rate cuts. This justifies our decision to push our forecast for the start of rate cuts back to November, from October. We have also revised our policy-rate and inflation-rate forecasts.
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