Latam Weekly: BCRP Decision, Latam Data vs US CPI and a TBD Tariffs Plan

ECONOMIC OVERVIEW

• If you unbuckled your seatbelt, strap in again, there’s more tariff risk around the corner to keep market volatility elevated and frustrate economists’ projections.

• A busy week of key Latam CPI data is followed by a quieter data slate where Mexican industrial production and a collection of Colombian macro figures on Friday are the highlights.

• As far as data are concerned, global markets will focus on US CPI on Wednesday, but the main event will be an (unscheduled) announcement by Pres Trump on a reciprocal tariffs plan.

• Peru’s central bank announces its latest rate decision on Thursday, when we expect a rate hold at 4.75% despite encouraging inflation trends and a benign currency environment—that would allow a March cut.

PACIFIC ALLIANCE COUNTRY UPDATES

• We assess key insights from the last week, with highlights on the main issues to watch over the coming fortnight in the Pacific Alliance countries: Colombia, Mexico and Peru.

MARKET EVENTS & INDICATORS

• A comprehensive risk calendar with selected highlights for the period February 8–21 across the Pacific Alliance countries and Brazil.

Chart of the Week

ECONOMIC OVERVIEW: BCRP DECISION, LATAM DATA VS US CPI AND A TBD TARIFFS PLAN

Juan Manuel Herrera, Senior Economist
juanmanuel.herrera@scotiabank.com

• If you unbuckled your seatbelt, strap in again, there’s more tariff risk around the corner to keep market volatility elevated and frustrate economists’ projections.

• A busy week of key Latam CPI data is followed by a quieter data slate where Mexican industrial production and a collection of Colombian macro figures on Friday are the highlights.

• As far as data are concerned, global markets will focus on US CPI on Wednesday, but the main event will be an (unscheduled) announcement by Pres Trump on a reciprocal tariffs plan.

• Peru’s central bank announces its latest rate decision on Thursday, when we expect a rate hold at 4.75% despite encouraging inflation trends and a benign currency environment—that would allow a March cut.

It’s been less than a week since Trump announced the US would impose tariffs on Mexico, Canada, and China but markets and economists have lived a lifetime over the period (like that scene in Saving Private Ryan where Matt Damon ages 50 years in a second). A rollercoaster of tariff announcements with agreed pauses or retaliatory moves, Banxico and BoE decisions, a flood of US data, and CPI figures from Peru, Chile, and Mexico (and Colombia later today, Friday) have kept everyone on their toes, ready to trade on the latest headline.

Who knows what awaits markets next week on the geopolitical front with Trump expected to unveil a reciprocal tariffs plan at a to-be-determined date, with the coverage of goods, countries, and tariff rates up in the air. Trade volatility will continue, but there are also key events and data on tap in Latam and the G10 to influence trading. Next week is split between a relatively quiet first half and a busier week starting Wednesday with the release of US CPI and the minutes to the latest BCCh decision, followed by the BCRP’s rate announcement on Thursday alongside more Latam, US, and UK data that day and on Friday.

Mexico’s calendar is fairly quiet next week as far as data and events are concerned, with the release of December industrial production figures out on Tuesday acting as the on-schedule highlight. As our local economics team explains in today’s report, Mexico’s manufacturing weakness was well entrenched at the close of 2025, with a fifth consecutive year-on-year decline expected in next week’s data—with limited optimism in the months ahead amid trade uncertainty (a partial driver of the team’s negative growth revisions). It will be trade risks and developments that should be in focus for Mexican markets as we monitor the possibility of movement in negotiations to make the US’s one-month tariff pause permanent. We’ll also keep an ear out for possible comments by Banxico officials after the 50bps cut decision.

The minutes to the latest BCCh decision are out on Wednesday, and should show caution among Chilean central bankers to consider additional rate cuts. Choosing to pause rate cuts at its January 28^th meeting, the BCCh also introduced a neutral bias to its statement, thus doing away with policy easing references amid near-term inflationary risks (see latest) that have even introduced the possibility of rate hikes. As things stand, our team in Chile does not expect hikes, but they no longer expect rate cuts by the BCCh in Q1 nor Q2 as shown in our previous Weekly, shifting their view to a rate pause at 5.00% lasting into Q3 (for an end-2025 rate of 4.50%, 25bps higher). We’ll see whether economists and traders agree, with their respective calls due for release on Tuesday and Friday in the latest results to the BCCh’s surveys.

Peru does not release key data during the workweek but, as one should be used to by now, the INEI will publish December GDP data on Sunday to leave markets to react to the figures on Monday; our team in Lima go over their projection for 4%+ y/y growth. Prior to the GDP data release, the BCRP has its monthly policy announcement on Thursday, when we expect that officials led by Velarde will opt for a rate hold after a 25bps rate cut that surprised a decent share of economists in January. The BCRP continues to get encouraging inflation prints, the PEN has been well behaved, and tariff risks are, so far, relatively limited for Peru so more easing is likely in coming months, though next week is likelier to be a placeholder with not enough information between meetings to go back-to-back.

Last but not least, Colombian markets will open on Monday to react to Friday’s January CPI data, as well as the Friday release of the government’s Financing Plan (see here) which, prior to its publication, our economists in Bogota anticipated would result in a steepening of Colombia’s sovereign debt curve. The reaction in markets, possibly that of rating agencies (at least in terms of statements), and public comments made by FinMin officials to calm markets (if needed) will be important to follow. Aside from public finances developments, we’ll also watch the release of Colombian international trade, retail sales, and industrial production data on Friday. With inflationary pressures heavily reignited by a huge minimum wage increase in January, the strength of Colombia’s economy is also under consideration by BanRep officials when it comes to resuming cuts after a late-January hold (see here). For now, we anticipate a 25bps cut at the March gathering. On a related note, in today’s report, the team looks at the possible impacts of domestic and external uncertainty on Colombia’s economy, with four key fronts to watch: market volatility, international trade, investment, and second-round effect of US immigration policy on remittances.  

PACIFIC ALLIANCE COUNTRY UPDATES

Colombia—Potential Impacts of the Political Uncertainty in Colombia

Jackeline Piraján, Head Economist, Colombia
+57.601.745.6300 Ext. 9400 (Colombia)
jackeline.pirajan@scotiabankcolpatria.com

Valentina Guio, Senior Economist
+57.601.745.6300 Ext. 9166 (Colombia)
daniela.guio@scotiabank.com

Daniela Silva, Economist
+57.601.745.6300 (Colombia)
daniela1.silva@scotiabankcolpatria.com

Political uncertainty is a typical ingredient of macro forecasting. Outside of Colombia, Trump’s tariffs threats have been a concern for the world. In the case of Colombia, the episode on Sunday, January 26^th, demonstrated that the US is willing to act against any country that doesn’t ‘cooperate’ with its security priorities (immigration and drugs). Although this episode was relatively short-lived, it demonstrates that political uncertainty remains key to assessing the risk balance.

In Colombia, a scenario of direct trade and financial restrictions would be extremely negative; this scenario is not the base case. Instead, we prefer to analyze some channels of the impact of current ongoing fears of a trade war. In that regard, we identify four potential fronts: the first is related to market volatility, the second is on trade accounts, the third is a real channel of investments, and the last is a second-round effect on remittances.

The first channel, market reaction, is instantaneous to new information. Since Trump’s election, the concern around the trade war has become evident in a stronger dollar. In the case of Colombia, some domestic developments are contributing to the COP deviating from this trend, especially the fact that the central bank has become even more cautious in the easing cycle due to risk around fiscal accounts, the minimum wage increase, and global uncertainty, which is in the short term fuelling carry trades positioning in COP coupled with some purchase of COLTES from offshore accounts. Second, we are closer to a tax season that usually impulses dollar inflows. Third, the economy is still growing below potential, and the demand for dollars for imports is insufficient to impulse a trend in the FX. In the case of a trade war escalation, the COP could respond to the uncertainty but could be contained by local developments. In our fundamental model, we see a fundamental value of around $4,350, which reflects the uncertainty for a potential trade war, but we estimate that around 100 pesos could vanish if the market perceives the trade war’s real implementation is not credible.

In the second channel, we have trade accounts. Exports, in real terms, represent around 14.5% of GDP, while imports are around 22% of GDP. In nominal terms (Balance of Payments), exports are 16.5% of GDP and imports are 18.7% of GDP. Exports are ~58% of traditional exports that include coffee, oil, ferronickel, and coal. Exports of oil are the most relevant account, representing ~32% of total exports. In the case of imports, ~47% are inputs, especially for the industrial sector (34% of total exports), while consumption goods represent 26% and capital goods represent 27%. The US is our main trading partner. However, our sales are focused on oil and primary goods, while imports are split between gasoline and mineral oils (30%), cereals (10%), and other input and machinery purchases (charts 1 and 2). On that front we see a contained impact as our products could have a relatively low price-elasticity. Additionally, in the indirect effect, Colombia could be positioned as an alternative market to deepen trade relations, however in the case of the destiny of imports, we are currently a limited market as economic growth is still below potential, while in the case of exports, we are still mostly based on primary goods, despite having seen a rebound in non-traditional exports.

The third channel is the most interesting one. The US government is using the trade war threat to leverage negotiations on other fronts. However, the confidence shock of this back and forth could reflect less appetite for real investment. In Colombia, we are already operating with very low investment levels (17% of GDP vs a pre-pandemic average of 22% GDP), and the international scenario could put an additional headwind on this front. Additionally, not only the private sector could have preventions to invest, but the economic policy authorities are also in a cautious mode; the central bank slowed down the easing cycle in December and stopped it in January, responding to domestic risks of inflation but also to international uncertainties. In the case of fiscal policy, the financing cost remains elevated, and global uncertainty represents a challenge that will prevent this cost from going down.

Our current forecast for GDP growth in 2025 is 2.6%, which assumes a more gradual recovery amid the uncertainties of local and international environments. However, if a trade war materializes, it could skew the forecast to the downside in a size that will depend on the duration and the way that restrictions are placed.

The last channel is remittances. In Colombia, remittances in 2024 were around USD 12 bn (~2.7% of GDP, half of oil exports) and represented an important source of income for some part of the population and could be one of the explanations for why the participation in the labour market in Colombia remains below pre-pandemic standards. The US policy to avoid illegal immigration could at least diminish the new flow of immigrants and slow down the increase of those inflows to the economy. Though we don’t expect remittances to contract, a stagnation in growth could at least motivate a moderate increase in labour participation, which, in the context of still-weak economic activity, could lead to a slightly higher unemployment rate. Our current forecast is an unemployment rate of 10.2% in 2025.

All in all, political uncertainty remains in the spotlight, but we must distinguish between threat and real action. For now, we maintain our current economic forecast, which includes the impact of increased caution in the central bank and limited space to have a fiscal impulse, all in a context in which we expect financial conditions to remain tight globally.

Mexico—Industrial Production on Tap; Negative Growth Forecast Revisions

Rodolfo Mitchell, Director of Economic and Sectoral Analysis
+52.55.3977.4556 (Mexico)
mitchell.cervera@scotiabank.com.mx

Miguel Saldaña, Economist
+52.55.5123.1718 (Mexico)
msaldanab@scotiabank.com.mx

Next week, INEGI will release industrial production data for December, in which we anticipate that the contraction observed over the past four months will continue, deepening the deterioration seen in November (-1.40% y/y). If the flash estimate for secondary industry GDP in the quarterly accounts is correct, industrial production would average an annual decline of -1.7% y/y during Q4, implying a similar decline in December alone (-1.7%), but we believe the risk is skewed to the downside. In this regard, despite the possibility of some rebound in manufacturing (as some agents may have brought forward their production in anticipation of potential tariffs in the U.S.), construction could maintain a decline close to the previous month’s figure (-4.2%). For mining, we foresee that the negative trend will continue, given the deterioration observed in oil production. Finally, we expect that utilities could serve as a buffer for the overall decline, with an annual expansion above 2.0%, although significantly below its pre-pandemic levels. With this, for the whole of 2024, the flash GDP estimate anticipated an annual advance of just 0.3%, thanks to the gains in the first half of 2024. At the beginning of 2025, we believe industry will remain in negative territory, resulting in the GDP component being most affected by uncertainty over trade relations between Mexico and the United States. Although it is neither clear nor desirable that tariff measures will be applied for either economy, the generated uncertainty has been sufficient for companies to adopt greater risk aversion in their business plans, particularly in manufacturing.

Considering this week’s events on tariffs and the Mexico-US relationship under the Trump administration we have decided to revise downward our forecast for Mexican GDP growth due to increased tariff uncertainty as well as the implementation of migration and drug trafficking policies that could impact both investment and consumption. In this regard, we anticipate that the Mexican economy will show less dynamism during 2025 and grow only 0.6% for the year, down from the previously forecast 0.8%. This is due to the expectation that the decline in both public and private investment will continue, as well as the slowdown in job creation. We also anticipate that remittances will be affected by the deportations and likely reduced migration to the north. The aforementioned factors, we believe, will undoubtedly affect consumption, one of the main drivers of the national economy. Similarly, we have revised downward our growth forecasts for 2026 and 2027, due to the impact and loss of competitiveness from lower investment.

Peru—The Strength of GDP Growth Going Into 2025 Trumps Trump’s Tariffs

Guillermo Arbe, Head Economist, Peru
+51.1.211.6052 (Peru)
guillermo.arbe@scotiabank.com.pe

Upcoming Data

On February 15^th, December and full-year 2024 growth figures will be released. We are optimistic that December growth will surpass 4.0%, going perhaps as high as 4.3% y/y. This would ensure 3.2% growth for the full-year, and even come within range of 3.3%.

Our 4.3% GDP growth forecast for December takes into account partial growth figures that have been released. These figures were quite robust. Fishing rose 76.8% y/y and agriculture was up 7.5%. Mining and oil & gas rose only 2.0%, but has added to growth, rather than subtracting, as the sector so frequently has in previous months (chart 3). 

The fishing and agriculture figures suggest the need to exercise a bit of caution in our optimism. The November to January fishing season was very strong. But, it ended in January. Excluding fishing, aggregate GDP would be trending in the low 3%, rather than hovering around 4%. Likewise, monthly agriculture GDP has been all over the place in 2024, after the 2023 El Niño wreaked havoc on the seasonal comparison base. Agriculture GDP rose 4.9% in full-year 2024, which irons out the volatility and is a truer measure of the sector’s performance.

More than the figures themselves, there is a general feeling that the economy is chugging along. The labour market has become clearly supportive, with the unemployment rate falling to 5.5% at year-end 2024, a level not seen in recent history (chart 4). Jobs growth is particularly strong in agroindustry, which is partly seasonal. However, jobs growth is broad enough to suggest that there is something more substantive behind it. On February 15^th, employment data for January will be released, giving us the first picture of how 2025 is shaping up. 

Also coming soon, fourth quarter demand components growth will be released on February 21^st. This will give us a better idea of just how strong consumption is, after having risen 3.5% in Q3. It will also tell us whether private investment continued weakish, or also began outperforming expectations as much of the rest of the economy has. The data will be crucial to see what is supporting growth, which, in turn, will give us more insight into whether we need to revise our 2.8% GDP growth forecast for 2025. Basically, the more evident it is that the private sector is driving growth rather than public sector spending, the more promising the outlook for 2025.

The Tariff Impact and Forecasts

The question have got the most over the past few days is how will the US tariff policy impact Peru. The first thing to consider is that no policy measure has been directed at Peru, nor is there reason to believe that—barring a global tariff—any will be. This means that any impact from tariffs will be indirect and, therefore, softened.

Since Peru is vulnerable to metal prices, the most likely conduct for an indirect impact from US tariff policy is through China. So far, however, the 10% tariff that has been levied on goods from China does not carry enough weight to have a strong impact on metal prices.

This does not mean that we see things for Peru as being on the same footing that they were a few weeks ago. We do see a greater risk environment and, as a result, are treading with greater caution in our future outlook, given how unpredictable US policy has become. It is not clear, for example, if the US tariff policy is part of a strategy that uses the threat of tariffs as a bargaining chip, or is it the result of a potentially enduring protectionist program. The distinction is important for Peru, because only the second case could conceivably lead to tariffs being levied that would encompass Peru exports.

In any event, as much as the future seems fraught with risk, our concerns regarding the measures given, or announced, so far are mild. As a result, we are not changing our forecasts. In particular, we will maintain our 2025 GDP growth at 2.8% for the time being, despite stronger-than-expected tailwinds going into 2025, which might otherwise merit an upward revision. Although, truthfully, we are also waiting to see what the Q4 demand components growth tells us.

Similarly, we are maintaining our year-end 2025 inflation forecast at 2.3%, despite the promising trend it has been following. Yearly inflation fell to 1.9% in January, and we expect inflation to fall even further in February–March, perhaps ending the quarter as low as 1.5%. Given this trend, it is tempting to revise our forecast downward. Instead, we shall err on the side of caution given the current environment of uncertainty, and postpone a revision for the time being.

We continue to expect the BCRP to lower the reference rate one more time in coming months, from 4.75% to 4.50%. What with inflation performing better than expected, we were wondering whether the BCRP might not be considering an additional cut, to 4.25%. However, given the recent US tariff spats, the BCRP is likely to share our sense of caution, and resist the temptation. If anything, the possibility that the bank keeps its rate at 4.75% is no longer unconceivable (chart 5).

The other variable that could potentially be affected by US trade policy measures or threats would be the USDPEN FX rate. And yet, outside of a bit of intraday volatility, the PEN has performed with extraordinary stability over these turbulent days. PEN stability is being underpinned by stronger-than-expected external balances. The trade balance figure for 2024 should be released next week, although the preliminary information we are receiving points to a record USD 73bn surplus.

Short-term, and given as the March–April tax season is approaching, which is a time when mining companies typically sell USD and buy PEN massively to pay taxes, we can expect the PEN to strengthen until May or so. This factor should dissipate in the second half of the year, to be replaced by concerns regarding the 2026 political elections, with the PEN weakening once again. But this is not new. What is new is that US trade policy/threats has introduced a bit more uncertainty regarding base metal prices. While we are not changing our FX forecasts, we will be monitoring copper prices closely. A lot of Peru’s economic future hinges on this.