Friday, January 21, 2022

Paraguay raises rate 6th time but says outlook weaker

      Paraguay's central bank raised its monetary policy rate for the sixth consecutive month - becoming the 10th central bank to raise rates this year - but slowed the pace of monetary tightening sharply, citing a weaker economic outlook due to drought and the latest wave of the COVID-19 pandemic.
      The Central Bank of Paraguay (BCP) raised its monetary policy rate by 25 basis points to 5.50 percent and has now raised it a total of 4.75 percentage points in the last six meetings of its monetary policy.
      It was only the second time since August, 2021, when BCP began the current monetary tightening cycle, the rate was raised by 25 basis points and the policy rate is now back to its level in the 12 months from July 2016.
      Pointing to the downside risks from the recent rise in COVID-19 cases due to the Omicron variant, a unanimous policy committee said it "considered its appropriate to continue with the process of normalization of monetary policy, but with a moderation of the pace of adjustment."
      In August last year, when BCP began rolling back its five rate cuts in 2020, which totaled 3.25 percentage points, the rate was raised by 25 basis points.
     However, BCP quickly accelerated the pace of monetary tightening.
     In September 2021 the rate was raised 50 basis points and then in the following three months (October, November and December), the rate was raised 125 basis points each month.
     At its last policy decision in December, BCP said the spread of COVID-19 in the region was moderate but today it said there was now a rise in infections linked to the Omicron variant and this amounted to a downside risks to the prospects for economic growth this year in the region.
     And while the cases of COVID-19 have risen worldwide, BCP said the waves of the contagion and the death rate from the Omicron variant was lower that in previous waves and data for December confirmed an improvement in global output based on higher manufacturing but slower services output.
     BCP has forecast economic growth of 5.0 percent for 2021 and 3.7 percent for 2022.
     The monthly indicator of economic activity (IMAEP) grew 4.8 percent in November but the central bank said downside risks to economic activity, such as adverse weather and a deterioration of the health situation, had materialized in recent weeks.
     However, with the length of the latest waves of the virus expected to be of shorter and the level of vaccinations improving, BCP said the impact of Omicron could have less impact on economic activity, especially in the services sector.
     As far as the balance of risks, BCP pointed to the rise in oil prices and the impact of the U.S. Federal Reserve's "imminent" normalization of its benchmark interest rate, which could push up inflation.
     Countering this upward pressure, the central bank pointed to the weaker outlook for the domestic economy due to drought and pandemic.
     Inflation in land-locked Paraguay has decelerated since hitting 7.6 percent in October and dropped to 6.8 percent in December.


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