Wednesday, July 20, 2016

Paraguay cuts rate by 25 bps while inflation rises in June

    Paraguay's central bank cut its monetary policy rate by another 25 basis points to adopt a more expansive policy stance to ensure that inflation converges to its 4.5 percent inflation.
    The Central Bank of Paraguay has now cut its rate by 50 basis points following a cut in May. This cut came after a 25 point hike in January and cuts totaling 100 points in 2015 on rising inflation.
    Although data for economic activity show clear signs of recovery, the central bank said there is still room for further improvement in some sectors and there is a moderate dynamic in credit.
    It added that on the international level, the pressures and risks to domestic inflation have eased due a postponement of rate changes by the U.S. Federal Reserve.
    Paraguay's inflation rate accelerated to 4.7 percent in June from 3.5 percent in May, but is down from a 2016-high of 5.2 percent in January when higher food prices pushed up inflation.
    In May the International Monetary Fund forecast that inflation is expected to ease to 4.5 percent during the year and remain at that level in 2017. The central bank targets inflation of 4.5 percent, plus/minus 2 percentage points.
   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 5,546.2 today, up 4.2 percent since the start of this year.
    In June the IMF said in its latest annual assessment that Paraguay's economy is expected to remain resilient this year and in 2017 though it will be tested if commodity prices remain weak and the economy of Brazil - its largest trading partner - remains in recession.
     The IMF expects economic growth in Paraguay of around 3 percent this year, similar to 2015, and 3.25 percent in 2017, led by agriculture and construction. The soy harvest, the country's major export crop, is expected to very good this year.


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