Publications

The Peruvian economy keeps performing solidly, supported by the strength of domestic demand. High terms of trade, the onset of new mining projects, and the recently approved pension funds withdrawal are expected to drive output growth to 3,1 % in both 2025 and 2026, despite the electoral uncertainty.

Last week, the Fed resumed its rate-cutting cycle with a 25bp reduction, its first move this year, citing a shift in the balance of risks amid weaker labor market data. It signaled more cuts ahead, with the median year-end rate projection falling after three steady meetings.

We expect Banxico to deliver a 25bp rate cut and to signal that the easing cycle still has room to continue. We think further easing toward at least the midpoint neutral rate estimate remains warranted amid a weak demand outlook.

Powell described today’s move as “a risk-management cut,” with rising downside risks to the employment mandate making it appropriate to resume “moving in the direction of neutral.”

Three developments shaped the Treasury market over the past month: a weak jobs report, a dovish tone from Powell at Jackson Hole, and renewed political pressure stemming from Trump’s push to replace Governor Lisa Cook from the Fed’s Board.

The absence of new language suggesting increased caution—despite recent core inflation stickiness—indicates that most members remain open to continuing the easing cycle, albeit at the current more gradual pace of 25 bps per meeting.

A rate cut in September remains a possibility if the labor market proves to be "on the edge" and weakens sharply, but that seems unlikely at this point. For now, "we have a long way to go to really understand exactly how [the tariff-related inflationary effect] will be."

We expect the Fed to leave rates unchanged at this week’s meeting and do not anticipate growing dovish support. The uncertainty over the end level of tariffs and its inflation impact, along with a still solid labor market, give the Fed room to wait.