Presidential run-off set for June 7; real GDP grew only 3.2% in March; fiscal risks balloon in 2026; inflation accelerates to 4%, but BCRP happy with policy pause
We discuss three topics in this report. First, we evaluate the electoral process, and the start of the presidential run-off election between Keiko Fujimori (KF) and Roberto Sánchez (RS) set for June 7. Next, we focus on the economy, and find it has begun a mild deceleration. We made an above-consensus forecast that the fiscal deficit would reach 3.8% of GDP in 2026, and recent decisions by the government and Congress are proving us right. Finally, we examine Banco Central de Reserva del Perú (BCRP, the central bank) policy and forecast that the BCRP’s Board will remain in a policy pause until early 2027. We expect inflation to converge with the official inflation target of 2% (+/- 1%) in early 2027, assuming no radical change in fiscal policy, particularly if Sánchez wins the presidency.
On May 5, the 60 Jurados Electorales Especiales (JEE, the special local electoral panels) began to review contested voting records (in some cases re-counting, vote by vote) and announced the winners in each region. The body then sent the results to the Jurado Nacional de Elecciones (JNE, the national electoral panel), and on May 17 announced that Fujimori, of the right-wing Fuerza Popular (FP) had won the first round of the election. It subsequently confirmed that RS of Juntos por el Perú (JP) had narrowly won second place. This marked the start of a run-off campaign that will decide the next president and vice presidents.
The Instituto Nacional de Estadística e Informatica (INEI, the national statistical institute) on May 15 released its March real GDP estimate. It confirmed that the economy had entered a phase of mild deceleration, and estimated that real GDP had advanced 3.2%, oya, below the 3.7% average for January and February.
Since the deceleration was less severe than we’d expected, we have revised our full-year 2026 forecast to only 3.1%, below the 3.2% forecast by the Ministerio de Economía y Finanzas. We have also revised down our 2027 forecast to 3.3%, from 3.4%. But this is still a preliminary estimate, with much depending upon who wins the June 7 presidential run-off.
We expect to publish our monthly forecast report in June but, based on recent events, can now confirm our decision to retain unchanged our above-consensus fiscal deficit forecast of 3.8% for 2026. We will review the rest of the profile in our next report, once the presidential winner has been announced.
The BCRP’s Board announced on May 14 that it had decided to keep its policy rate unchanged at 4.25%, as anticipated by our forecast, and by market consensus. This is despite headline and core inflation having accelerated to above the BCRP’s official inflation target rate of 2% (+/- 1%).
Looking ahead, our forecast is aligned with the BCRP’s, and we anticipate both headline and core inflation converging with the BCRP’s inflation target range in early 2027. We also agree with the BCRP’s characterization of the recent acceleration being due to a one-off supply shock that should be diluted in the months ahead. We therefore expect the BCRP’s Board to remain in its policy pause, barring further political shocks -- such as Sánchez winning the presidential run-off, inducing investors to begin capital flight, as happened in July 2021.
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