Paraguay's central bank cut its monetary policy rate by 25 basis points to 5.75 percent, saying the balance of risks in the domestic and external economy had changed, allowing it to adopt a more expansive monetary policy in a timely manner.
The Central Bank of Paraguay raised its rate by 25 points in January after cutting it by 100 basis points in 2015. But since the rate hike, inflation has decelerated.
In April inflation eased to 4.5 percent from 4.7 percent in March and a 2016-high of 5.2 percent in January.
The rise in inflation in the first months of this year was largely due to volatile food prices and the International Monetary Fund said earlier this month the country's inflation rate was expected to decline to 4.5 percent during this year and remain at that level next year.
The central bank targets inflation of 4.5 percent, plus/minus 2 percentage points.
The central bank said the decline in inflation was expected and while overall economic activity was expanding moderately, certain sectors had slowed.
Paraguay's economy grew by an estimated 3 percent last year, among the strongest in Latin America, but has been losing momentum. In the fourth quarter of last year, the economy grew by only 1.1 percent year-on-year, down from 2.3 percent in the third quarter.
Despite risks to growth, including a further slowdown in Brazil and a fall in commodity prices, the IMF expects Paraguay's economy to remain resilient, with growth this year projected at 2.9 percent and 3.25 percent in 2017.
The exchange rate of Paraguay's guarani started depreciating in September 2014 and lost 20 percent against the U.S. dollar in 2015 before hitting a low of 5,967 to the dollar in late January.
But since the central bank's rate hike on Jan. 20, the guarani has bounced back and was trading at 5,609 to the dollar today for an appreciation of 3 percent this year.