The Bank for International Settlements published a working paper analysing how El Niño Costero, a local form of the El Niño–Southern Oscillation (ENSO), affects Peru’s inflation, economic activity and the effectiveness of monetary policy. Using Peruvian data and a semi-structural model with non-linear climate-shock transmission, the paper characterises El Niño shocks as persistent supply-side disturbances that simultaneously lift inflation and contract GDP, creating material stabilisation trade-offs; it finds that a more hawkish conventional policy stance can still help stabilise inflation dynamics, but with limited traction when shocks are large and recurrent. Empirically, the paper’s local-projection estimates show annual inflation rising by nearly 4% in the first year after the onset of an El Niño shock, with the CPI level remaining elevated even three years later. Food and energy prices account for most of the short-run inflation response, while core CPI drives medium-term persistence; inflation expectations respond with a lag, peaking at about 45 basis points around one year after the shock before gradually returning close to pre-shock levels after around two years. GDP falls by about 0.6% in the first quarter, with early losses driven by primary sectors, while the deepest aggregate contraction occurs later, with output nearly 5% below its pre-shock level in the second year as non-primary sectors weaken. Sector results show particularly large immediate effects in fishing (around a 27% contraction) and sizeable declines in primary manufacturing (around 8%) and agriculture (troughing at roughly 5.5%), whereas non-primary sectors react with lags and more persistent downturns. The semi-structural framework embeds threshold effects using the coastal El Niño index (ICEN), linking higher-intensity episodes to additional channels including potential GDP losses, inflation-expectations pressures and a credibility mechanism under which repeated inflation deviations can weaken anchoring and raise the cost of stabilisation.
Bank for International Settlements 2025-07-10
Bank for International Settlements working paper finds El Niño shocks in Peru raise inflation and depress GDP with persistent effects
The Bank for International Settlements released a working paper on El Niño Costero's impact on Peru's inflation, economic activity, and monetary policy. It finds El Niño shocks cause persistent supply-side disturbances, raising inflation and contracting GDP, with limited stabilization from a hawkish policy stance during large, recurrent shocks. The paper highlights short-term inflation driven by food and energy prices, notable GDP declines in primary sectors, and challenges in stabilizing inflation expectations.