Friday, March 22, 2019

Paraguay cuts rate 2nd month in row, still data-dependent

     Paraguay's central bank lowered its policy rate for the second month in a row to ensure inflation moves towards its target as the latest economic data shows a deceleration in the pace of growth in parts of the economy.
     The Central Bank of Paraguay (BCP) cut its rate by another 25 basis points to 4.75 percent and has now cut it by 50 points this year following a cut in February.
     Since May 2016 BCP has cut its rate five times and by a total of 125 basis points.
     As in February, BCP said the next policy decision will depend on economic data, both internal and external, and its monetary policy committee was again unanimous in its policy decision.
     In its statement, BCP noted the downside risks in the international economy and the U.S. Federal Reserve's more conservative stance regarding the pace of monetary changes.
     Within South America, BCP said Argentina's economic situation remains complex although stabilization measures have been put in place while the economic recovery in Brazil is slower than expected.
     Inflation in Paraguay has mainly stabilized but remains at a low level, BCP said.
     Paraguay's headline inflation rate rose slightly to 2.7 percent in February from 2.4 percent in January but remains well below BCP's target of 4.0 percent.
     Earlier this month the International Monetary Fund said Paraguay's economy had grown rapidly in the past 15 years - an average of 4.5 percent -  helping reduce poverty, with prudent macroeconomic policies, low inflation and low fiscal deficits playing an important role,
     Going forward, the IMF said the key challenge will be to sustain this growth as the boom in agricultural commodities may provide less support going forward.
     Last year Paraguay's economy grew 3.75 percent, driven by strong domestic demand that was fueled by a rebound in credit growth, but growth was uneven as the economy was hit by spillovers from regional financial turbulence.
     Argentina's financial crises led to a risk aversion against the region, hitting Paraguay's guarani, although by less than the fall seen in Argentina's peso. The result was the guarani rose against the peso and Brazil's real, hitting tourism from those countries and trade.
     This year the IMF expects Paraguay's economy to expand around 3.5 percent, with a drought expected to reduce the soybean harvest but this should be partly offset by a pickup in tourism and trade as the exchange rate shocks from 2018 unwinds.
     IMF said BCP's monetary policy stance appeared appropriate, with inflation set to move back to 4.0 percent by the end of the year last year's rise in the guarani reverses.
     Against the U.S. dollar the guarani lost 5.9 percent in 2018 and it has continued to lose ground this year and was trading at 6,152 to the dollar today, down 3.3 percent this year.


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