Right-wing candidates take the lead; energy price shock justifies growth forecast cut and inflation forecast hike; we project BCRP policy pause for 2026
In this forecast, we review our political scenarios; the impact of supply-price shocks on the economy and inflation; and the likely response by the Board of the Banco Central de Reserva del Perú (the BCRP, Peru’s central bank).
Since the end of February, local politics and geopolitics have moved to the fore. We have therefore decided to revise our base, high and low-case scenarios. We increase our weighting of the base case, to a 45% probability, up from 40% in December. Under this scenario, we assume that a center-right party will win the April 12 elections. For similar reasons, we’ve already increased our weighting of our high case, to 35% from 30%. Under this scenario, we anticipate a situation similar to what occurred in 2016, when two right-wing parties won the presidency, and gained simple majorities in the Congress and Senate. The low-case scenario is consequently left with a reduced weighting, of only 20%, down from 30%. The probability of a radical left-wing victory in the presidency, Congress or the Senate is low, according to the most recent polls.
Since our February report, the economy has been hit by three supply shocks that justify revisions to our growth and government finances forecasts. Under our base case, the new forecast projects real GDP growth of only 2.3% in 2026, down from the 3.2% projected in our December forecast; and we have also revised up our 2027 forecast, to 3.4% from 3.2%.
The government has provided only limited assistance to business and households to offset supply shocks. Government finances have been impacted by reduced terms of trade, lower economic growth, a weaker currency and higher local and international interest rates. The new forecast projects the overall fiscal deficit, excluding defense expenditure, reaching 3.8% of GDP, wider than the 3.4% we forecast in December.
A side effect of the supply-price shocks will be a temporary acceleration of inflation. We now forecast December 2026 inflation under our base case scenario to reach 2.8%, up from 2.2%. Most of the effect should be seen in March and April. The question is: will the BCRP Board respond with rate hikes? This depends upon a number of factors, the most relevant likely the magnitude and duration of the international oil shock. Domestically, the election results will also be relevant.
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