Boluarte government weakened further; economic recovery takes off in Q1 2024; BCRP’s 25bp cut surprises markets
In this report we discuss recent political developments, with a focus on President Dina Boluarte; using high-frequency economic reports, we present our updated forecast, and argue that the economy rebounded in Q1 2024; and discuss the BCRP Board’s decision to cut rates by 25bp, surprising both market consensus and us.
We argue that, since our last report, three recent developments have dominated the political scene. These are the Boluarte Rolex scandal; Congress’ surprise no-confidence vote in new Prime Minister Gustavo Adrianzén; and preparations for the 2026 presidential and congressional elections. These events have weakened Boluarte’s political position, and strengthened the position of Congress (notwithstanding the significant unpopularity of both). In Congress, both right and left-wing political groups have benefitted, extracting concessions from the state, such as the approval of legislation that benefits their respective party members, and positions them favorably for the upcoming elections.
On the economy, we argue that the most recent high-frequency reports confirm the beginning of recovery in Q1 2024, supporting our March decision to revise up our full-year 2024 real GDP growth forecast to 2.5% and to 3% for 2025. The January real GDP report from the Instituto Nacional de Estadística e Informatica (INEI, the national statistical institute) indicates that the economy advanced 1.4% oya in that month, and the INEI’s February report confirmed a further advance, of 2.8% oya. Our March forecast projects more moderate growth, of 1.7% oya.
The BCRP Board surprised markets by cutting its policy rate by 25bp, when the market consensus had expected an extension of the policy pause initiated at its March meeting. And in March, the surprise had come in the opposite direction, with market consensus projecting another cut, and the Board leaving its policy rate unchanged. We will retain our forecast that the Board will continue to cut rates until it converges with the 5% target, expected by year-end, followed by 4% in 2025, and 3% in 2026. Although we had forecast that the Board would pause in April amid higher m/m inflation, the forecast projected that that would continue in May.
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