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Paraguay raises rate to control inflation expectations

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     Paraguay’s central bank followed the trend in Latin America, and in many other developing nations,  and raised its key interest rate to ensure rising inflation doesn’t end up boosting inflation expectations.
     The Central Bank of Paraguay (BCP) raised its monetary policy rate for the first time in 5-1/2 years, saying its monetary policy committee considers it appropriate to begin the gradual process of normalizing monetary policy to ensure it meets its inflation target.
       BCP raised its monetary policy rate by 25 basis points to 1.0 percent, the first rate hike since January 2016. 
     However, the committee also noted that it monetary policy stance still remains “highly expansionary” and will continue to support the country’s economic recovery despite the rate hike.
     Following the rate hike in January 2016, BCP embarked on a monetary easing cycle only five months later, cutting its rate 13 times from May 2016 until June 2020 and by a total of 5.25 percentage points. 
     This includes 5 cuts in 2020, including 3 cuts in the month of March.
     In recent months, however, BCP made it clear it was getting ready to begin normalizing its monetary policy stance and in its previous policy statement on July 22 it said it was continuing to monitor inflation and inflation expectations to begin a gradual process of normalizing monetary policy in the immediate future.
     Paraguay becomes the 25th central bank to raise its key rate so far this year in response to rising inflationary pressures, following in the foot steps of other Latin American central banks such as Brazil, Mexico, Chile, Uruguay and Peru.
      BCP said the growth prospects of its main trading partners had continued to improve and domestic economic activity was also showing good progress though the services sector was still lagging.
     The immunization of the country’s population is leading to improving consumer confidence but the increased in the delta variant of COVID-19 has increased the risks to economic expansion.
      Higher commodity prices internationally has boosted Paraguay’s inflation rate in recent months and in light of the improved economic performance, the rise in inflation – even if it is largely due to external factors – could eventually generate second-round effects and impact inflation expectations, BCP said.
     Inflation in Paraguay rose to 5.2 percent in July, the highest since January 2016, above the central bank’s target of 4.0 percent.


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