Monday, February 22, 2021

Paraguay holds rate, looks toward policy normalization

     Paraguay's central bank left its policy rate steady for the 8th month in a row and while it affirmed the current easy monetary policy was still compatible with its inflation target, it said it will now evaluate the impact of the economy on prices "in order to start a gradual process of normalizing monetary policy in the near future."
     The Central Bank of Paraguay (BCP) kept its policy rate at 0.75 percent after cutting it five times in 2020 by a total of 325 basis points.
     BCP has been in monetary easing cycle since May 2016 and its last rate cut in June 2020 was the 13th cut since it began lowering the rate from 6.0 percent for a total reduction of 5.25 percentage points.
     As in January, the decision by the bank's monetary policy committee was unanimous but it is the first time the committee has made a reference to normalizing its policy.
     In January, for example, the committee only said it continued to carefully the impact of new developments, both international and local, on monetary policy.
      The bank said the prospects for global economic growth in 2021 had improved and data for the domestic economy and demand showed greater "dynamism" toward the end of last year.
     In recent months, the construction, livestock and manufacturing sectors have shown a good performance, adding to the gradual recovery of the services sector.
     This year the favorable outlook for the agricultural sector, together with a stronger impulse from the external sector, will determine the speed of how fast the economy recovers, especially from the second quarter onwards, BCP said.
     Nevertheless, there is still a risk from the COVID-19 virus, with the mitigation of this depending on the roll-out of vaccinations.
     Inflation in the land-locked South American country has remained low and inflation expectations over the monetary policy horizon are still aligned with the bank's target of 4.0 percent, the bank said.
     Paraguay's gross domestic product shrank an annual 1.2 percent in the third quarter, better than a 6.5 percent fall in the second quarter, while inflation has been rising since July last year and hit 2.6 percent in January, up from 2.2 percent in the previous two months.
     In December the central bank estimated the economy would contract 1.5 percent in 2020 and then expand 4 percent in 2021 while inflation would rise to 3.9 percent.
     After hitting a record low in late November last year, the exchange rate of Paraguay's guarani has been appreciating.
      Today the guarani was trading around 6,812 to the U.S. dollar, up 2.4 percent since the start of 2021 and up almost 4 percent since a record low around 7,082 on Nov 29, 2020.
     But since the start of 2020, the guarani is still down 5.3 percent.



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