- Peru: Headline and core inflation continue to decline in February
Tariffs on Mexico and Canada are finally here. After a one-month reprieve, the White House has launched additional 25% duties on all Mexican and Canadian goods—with only some small exceptions like de minimis imports or Canadian energy at 10%. The US also raised tariffs on Chinese goods by an additional 10ppts, over the 10% additional rate levied in early-February, to which China again responded in measured fashion (as much as 15% on US farm products this time). Canada has already rolled out its own retaliation of 25% tariffs on CAD30bn in imports from the US with another CAD125bn subject to a 25% tariff hike in three weeks if the US does not lift their tariffs, and PM Trudeau may announce more measures shortly.
Mexican Pres Sheinbaum expressed her disappointment over Trump’s tariff’s in today’s morning presser, given the efforts made on immigration and drug trafficking, and stated that she will announce retaliatory tariff and non-tariff measures on Sunday at the capital’s main square. There are no details yet on what goods may be impacted by Mexican tariffs, but these measures are unlikely to cover all imports from the US so as to prevent massive damage to manufacturing supply chains and lessen the inflationary blow (similarly to Canada). Sheinbaum also said that she will speak to Trump later this week (possibly Thursday), which helped alleviate some of the negative pressure on the MXN that just about grazed the 21 pesos per USD level this morning as Sheinbaum teed up retaliation.
Markets have by and large already reacted to the news yesterday after Trump said that the 25% would start today, which sent the MXN closed to 1% weaker to the 20.75–80 zone and also took the CAD briefly through 1.45. Today, while the CAD is sitting unchanged, the MXN is the worst performing major currency, falling 1%, mostly on the back of Sheinbaum’s pledge. At the opposite end, the CHF and JPY lead with 0.6–0.8% gains supported by haven-seeking trading, while the EUR is also trading 0.3% higher, relatively unscathed by a ramp-up in protectionism and helped by lower US rates (even if the EU “is next” when it comes to Trump tariffs, likely in early-April).
The risk tone remains negative today, as losses at the open roughly around 1.5–2% in the main US, Mexico, and Canadian indices extend yesterday’s downtrend on risk-off trading. Note that the S&P 500 has today erased all gains made since the US election, a development that may catch Trump’s eye in gauging the negative impact of his tariffs. US yields were driving marginally higher in Asia hours before trading lower since around the European open to now sit about 6/7bps lower in 2s and 2bps in 10s (in contrast to yesterday’s bull flattening that had a more haven-driven feel to it) with similar moves seen in EGBs though gilts are more evenly bid about 5bps across the curve. Early dealing has Mexican debt trading cheaper across the curve with a steepening bias, though 1–2bps yield increases in the front-end and 2–3bps rises in the 10yr space are relatively limited.
It is a very quiet day ahead as far as on-calendar risks are concerned both for Latam and for the G10 with no key data on tap, but with markets liable to remain volatile on the flood of headlines regarding trade relations with the US. Trump also addresses Congress tonight, when he will likely take a victory lap for his disruptive tariffs and perhaps announce major geopolitical moves (NATO exit?). For now, markets dislike the tariffs decision, but they also seem to believe (based on bad but relatively contained losses) that these may be watered down or removed in coming weeks/months (partly based on Trump precedent). We’re less optimistic, however, as the US has not presented a clear measure of “success” in tackling drug and immigrant flows by Canada and Mexico, and Trump has (so far) paid little to no attention to the negative reaction in markets or complaints by US business leaders; it may take plummeting approval ratings or steep increases in inflation to push him to reassess his damaging trade policies.
—Juan Manuel Herrera
PERU: HEADLINE AND CORE INFLATION CONTINUE TO DECLINE IN FEBRUARY
Monthly inflation was positive in February, however, due to a stronger base effect, annual inflation continued to decrease. We maintain our 2.3% scenario for general inflation in 2025 and 4.50% for the terminal reference rate (chart 1).
Headline inflation stood at +0.19% monthly in February, in line with the +0.2% expected by the Bloomberg market consensus but below that recorded in the same month of 2024 (+0.56%) and the historical average of the last 20 years (+0.27%). With this, annual inflation slowed from 1.9% in January to 1.5% in February, continuing below the midpoint of the Central Reserve Bank’s (BCR) target range (chart 2).
The increase in general inflation during the month is explained by higher prices in the restaurants and hotels category (+0.39%) mainly due to higher prices on the menu in restaurants, food and non-alcoholic beverages (+0.19%) and education (+0.37%)—although the school season begins in March, price movements have already been observed since February.
Core inflation, the trend component that excludes food and energy, also increased by 0.19% in February, close to the historical average of the last 20 years (+0.17%) but below that recorded in the same month of 2024 (0.51%). In year-on-year terms, it decreased from 2.4% in January to 2.1% in February.
The base effect is expected to persist in March, with annual general inflation falling to 1.2% or 1.3%, before beginning to rise in the following months. Inflation would remain below the midpoint of the target range (2.0%) until Q3-25 and would continue to increase to 2.3% towards the end of the year due to a base effect.
Regarding the BCRP reference rate, we anticipate a final 25bps cut, bringing the terminal rate to 4.50%. We expect this final cut to take place in either March or April, with a higher probability assigned to March, given the low levels of inflation, an exchange rate below S/3.70 and good dynamics in economic activity, in addition to maintaining the pace of cuts that has been taking place since September 2024.
—Ricardo Avila
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