Peru's Monetary Policy and Investment Opportunities Amid Stable Inflation and Currency Strength

Peru's macroeconomic landscape in 2025 has been marked by a rare convergence of stability and cautious optimism. Annual inflation closed at 1.51%, the lowest year-end rate in eight years, comfortably within the Central Bank of Peru's (BCRP) target range. Simultaneously, the Peruvian sol has shown resilience, with exchange rate projections suggesting it will remain within 3.35 to 3.45 soles per dollar by year-end. These conditions, coupled with a policy rate held steady at 4.25% since May 2025, create a compelling backdrop for investors seeking exposure to emerging markets. Yet, as with any investment, understanding the interplay between monetary policy, currency dynamics, and political risks is critical to unlocking value in Peru's equities and local currency bonds.

Monetary Policy: A Balancing Act

The BCRP's easing cycle, which reduced the policy rate by 200 basis points since January 2024, has been instrumental in curbing inflation while supporting growth. By December 2025, core inflation stabilized at 1.8% year-over-year, signaling that underlying price pressures remain subdued. This has allowed the central bank to adopt a "wait-and-see" approach, with no rate hikes anticipated in 2026. Such predictability is a boon for investors, as it reduces uncertainty in capital allocation. However, the BCRP's hands-off stance also reflects structural challenges: Peru's inflation is increasingly driven by services, such as education and hospitality, which are harder to manage through traditional monetary tools. This underscores the need for complementary fiscal and structural reforms, which remain absent amid political gridlock.

Equities: Growth Amid Governance Risks

Peru's equity market offers a paradox. On one hand, the country's GDP is projected to grow by 2.9% in 2025, supported by a rebound in domestic demand and $6.9 billion in foreign direct investment in 2024. The government's Works for Taxes program and ProInversion's $41 billion infrastructure pipeline further highlight the potential for long-term value creation in sectors like energy and transportation. On the other hand, political instability-exemplified by President Dina Boluarte's low approval ratings and frequent ministerial reshuffles- casts a shadow over investor confidence.

For equity investors, the key lies in sector selection. Infrastructure-linked equities, particularly those tied to public-private partnerships, appear most resilient to political headwinds, as these projects are often shielded by long-term contracts. Conversely, sectors sensitive to social unrest, such as mining, remain exposed to operational risks. As one analyst notes, "Peru's openness to FDI is a double-edged sword"; it attracts capital but also amplifies the impact of governance failures.

Local Currency Bonds: Yield and Caution

Peru's local currency bond market presents another intriguing opportunity. The 10-year government bond yield is projected to trade at 5.49% by the end of Q4 2025, with further declines expected to 6.46% within 12 months. This yield premium, combined with Peru's investment-grade ratings from Fitch, Moody's, and S&P, makes its bonds attractive for yield-hungry investors. However, the political risks that deter equity inflows also apply to debt markets. A downgrade or a spike in social unrest could trigger capital flight, as seen in 2023 when protests led to a 15% depreciation of the sol.

The BCRP's conservative fiscal management and $40 billion in international reserves provide a buffer against such shocks. Yet, investors must remain vigilant. The central bank's reliance on sterilized interventions to stabilize the sol-rather than addressing underlying fiscal imbalances- suggests that currency strength may not be sustainable in the long term.

Strategic Entry Points

For investors, the current environment in Peru demands a nuanced approach. Equities in infrastructure and utilities, where demand is inelastic and regulated, offer a hedge against political volatility. Similarly, local currency bonds with shorter maturities can capture yield without overexposure to currency or credit risks. However, both asset classes require active monitoring of Peru's political calendar.

The BCRP's policy rate is unlikely to change in 2026, but the real test will come in 2027, when the next presidential election could disrupt the fragile consensus on fiscal discipline. Until then, Peru's stable inflation and currency strength provide a window of opportunity-one that investors should seize with caution but not abandon out of fear.