Boluarte’s bid for popularity fails; economy slows, but should grow 2.8% in 2024; BCRP likely to cut 25bp per month until December
We discuss three topics in this report. We begin with President Dina Boluarte‘s recent failed attempt to boost her popularity. We next consider the June real GDP report from the Instituto Nacional de Estadística e Informática (INEI, the national statistical institute), which confirms a sharp economic deceleration. Finally, we examine the surprising decision by the Banco Central de Reserva del Perú (BCRP, the Central Bank) Board to cut rates at its August 8th meeting.
July is a month loaded with political decisions, and presidents typically try to leverage these announcements to boost their popularity. On July 26th, following intensive political negotiation, Eduardo Salhuana of the Alianza para el Progreso political party was elected as the new speaker of Congress. On July 28th, the anniversary of Peruvian independence, Boluarte delivered her annual speech to Congress, offering an assessment of the past year in government, and laying out her policy priorities for the coming 12 months. This was an opportunity for the president and Congress to renew their respective alliances, and for Boluarte to try to appeal to the general public. Her speech was highly detailed and, at over four hours, one of the longest in Peruvian political history. The president communicated three main messages: 1) that there would be a new budget of around PEN18bn ($4.9 billion, or 2.2% of GDP); that the minimum wage would be raised, mainly benefiting formal workers; and that the government would establish a new infrastructure ministry, aimed at accelerating government investment projects.
Our growth forecast projected economic deceleration from H2 2024. However, the INEI’s June real GDP report, released last week, indicates that deceleration began sooner than expected, and that the economy grew only 0.2% oya in June, following 5.4% in April and 5.1% in May. This justifies our decision to revise down our full-year 2024 real GDP growth forecast to 2.8% y/y, from 3%, while retaining unchanged our 2025 and 2026 forecasts, each at 3% y/y.
Surprising most analysts, the BCRP Board at its August 8th meeting cut its policy rate by 25 bps, to 5.5%. We’d expected the Board to extend its policy pause until October, and to deliver three cuts in the last three months of the year, to bring its policy rate to 5% by year-end. But Board’s decision indicates that the drivers we’d anticipated had materialized sooner than expected. Close inspection of the Board’s policy statement, last week’s comments by the president of the U.S. Federal Reserve and Peru’s recent inflationary performance all lead us to believe that the BCRP Board will deliver one cut of 25bp per meeting until December, lowering its policy rate to 4.25% by year-end.
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