Monday, November 22, 2021

Paraguay raises rate 4th time but may now pause hikes

      Paraguay's central bank raised its key interest rate for the fourth month in a row, but dropped last month's pledge of continuing the current cycle of interest rate changes, signaling it may leave rates on hold while it weighs the future course of monetary policy.
     The Central Bank of Paraguay (BCP) raised its monetary policy rate by 1.25 percentage points to 4.0 percent and has now raised it 3.25 percentage points this year following rate hikes in August, September, October and today.
     BCP has now unwound all last year's five rate cuts, with the rate back to the level it was in February 2020 before the bank cut the rate three times March followed by a cut in April and then June.
     Today's rate hike comes after the bank's monetary policy committee (MPC) in October raised the rate by 1.25 percentage points and said it would raise the rate by the same amount at today's meeting.
     The MPC today re-affirmed its commitment to price stability and said it would closely monitor internal and external economic variables to determine the future course of monetary policy.
     Today's decision was unanimous.
      Noting that COVID-19 cases in South America "remain moderate," which has supported favorable rates of economic growth, BCP also said inflation remains high, which has led to the adoption of a less expansionary monetary policy.
      Inflation in the land-locked country rose for the sixth month to 7.6 percent in October from 6.4 percent in September, above the central bank's target of 4.0 percent, plus/minus 2 percentage points.
     Although BCP said the rise in inflation is largely due to higher prices for food and energy internationally, it also said higher demand for beef had put upward pressure on local prices.
     "Taking into account the better economic outlook, the second-round effects of these initial shocks may become relevant, as well as negatively influence medium-term inflation expectations," BCP said.
      Greater persistence of inflation could also be associated with fiscal policy that is not carried out according to the guidelines of sustainability, the bank added.
      Paraguay's gross domestic product grew an annual 6.9 percent in the second quarter, up from 0.5 percent in the first quarter, and BCP said economic activity remained dynamic and in line with its own forecast for this year.
      On Friday the central bank's governor, Jose Cantero, was quoted by press as saying GDP this year could top the bank's forecast of 4.5 percent growth based on the accumulated expansion of 5.7 percent so far and the latest indicators of economic activity.
      Cantero also admitted inflation was above the bank's target but added medium-term expectations were in line with the target and financial markets still find the bank's monetary management as credible.


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