Fujimori faces opposition in Congress; fiscal consolidation still uncertain; BCRP Board to deliver a 25 bp hike in October
In this report we focus on three topics. First, we discuss the principal political challenges facing the Fujimori government; then we focus on fiscal sustainability; and finally, we substantiate our call that the Board of the Banco Central de Reserva del Perú (BCRP) will hike its main rate by 25 basis points in October, albeit as a one-shot hike, rather than as the beginning of a tightening cycle.
In politics, the focus has turned to Congress’s discussion of the Fujimori government’s request for fast-track reforms, and the October 4 gubernatorial and mayoral elections. The overall message is that the government’s proposed reforms may take longer than expected. And with the results of the local and regional elections uncertain, there’s a risk that the congressional divide that emerged during the general elections in April and June will reopen, with the candidates from right-wing political parties winning in the “modern” cities (significantly in Lima) and the left wing winning the regressive governorships and mayoral elections in the provinces.
Peru’s fiscal accounts have improved considerably in 2026, but the composition of that adjustment is becoming less favorable. On the 12-month moving average, the fiscal deficit fell to 1% of GDP in July, from 2.2% in December 2025 and 2.6% a year earlier, its lowest level since mid-2022. The improvement has been supported primarily by higher revenue. However, the headline improvement masks a less benign change in the composition of expenditure: in real terms, current spending increased 8.2% in January-July, while capital expenditure contracted 7.2%.
The BCRP Board left its policy rate unchanged at 4.25% in September, but the inflation backdrop has become considerably less comfortable, and we expect the Board to hike its rate by 25 bp in October. Headline inflation reached 4.4% oya in August, up from 4.1% in July, while inflation excluding food and energy eased only marginally, from 4.6% to 4.5%. Twelve-month-forward inflation expectations also increased, to 3.1%, slightly above the upper boundary of the BCRP’s 2% (+/- 1%) target range. We therefore don’t construe the Board’s September decision to hold rates steady as a signal that inflation risks have disappeared. Rather, that move allowed the Board to continue its assessment of whether the significant supply shocks that pushed inflation higher earlier in 2026 are developing into a more persistent trend.
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