Politics moves to the forefront; economy to decelerate in Q4 2026; BCRP to stand pat in 2027
In this forecast report, we discuss the new political environment, Peru’s economic performance amid the El Niño weather shock and our interest rate forecasts.
In politics, the focus has turned to congressional approval of the government’s request for delegated legislative faculties, as well as the results of the October 4 gubernatorial and mayoral elections. The message is that political developments have gathered into a stronger headwind than expected, and the impact on business expectations is already noticeable. This may translate into a reduced potential growth rate from that indicated by the promised structural reforms. One side effect has been the slide President Keiko Fujimori’s popularity, as indicated by Bloomberg’s Latam Pulse September poll. In net terms (positive minus negative), Fujimori’s popularity dropped to -25.3, from +2.5% in August.
The El Niño weather shock has developed into the main downside risk to Peru's economic outlook. The weather phenomenon has intensified ahead of the 2027 rainy season, with the U.S. National Oceanic and Atmospheric Administration (NOAA) assigning an 83% probability of a strong-to-very-strong event starting in late 2026, and persisting into early 2027. In Peru, the Comisión Multisectorial Encargada del Estudio Nacional del Fenómeno "El Niño" (ENFEN, Multisectoral Commission for the National Study of El Niño) projects unusual coastal warming through January. These conditions raise the risk of flooding, damage to infrastructure, and disruption to production and other economic activity. In this report, we posit two scenarios: our baseline, where we have lowered our GDP growth forecasts from 3.3% to 3.2% for 2026, and from 2.9% to 2.8% in 2027; and our severe scenario, where we project real GDP advancing 2.9% and 1.5%, respectively.
The Board of the Banco Central de Reserva del Perú (BCRP, the central bank) kept its policy rate unchanged at 4.25% in October, in contrast with our forecast calling for a 25 bp hike. Although we anticipated this risk, the combination of an economy growing above-trend, headline inflation reaching 4.6% in September and 12-month-forward inflation expectations converging to 3.1% justified a preemptive hike. But the October pause indicates that the Board is more willing than we expected to tolerate inflation temporarily above its target range, particularly when driven by supply shocks. Most recent reports on inflation and the risk of El Niño slowing the economy justify the BCRP Board remaining in a policy pause through 2027.
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