Paraguay’s central bank lowered its monetary policy rate for the fourth time this year as inflation continues to trend downward and there are no signs of inflationary pressures in coming months.
The Central Bank of Paraguay (BCP) cut its policy rate by another 100 basis points to 1.25 percent and has now cut the rate by a total of 275 basis points this year following three cuts in March.
The first of those three rate cuts last month followed a regularly scheduled meeting of BCP’s monetary policy committee on March 13 but the following two cuts (March 16 and March 30) were taken after extraordinary policy meetings.
Paraguay’s inflation rate rose slightly to 2.5 percent in March from 2.4 percent in February but BPC said global economic growth projections have been revised significantly down in the face of the Covid-19 pandemic, and uncertainty remains high about the duration of the pandemic.
Within South American, economic activity is deteriorating and this could be exacerbated by a worsening of international financial conditions as illustrated by rising risk premiums for emerging and developing economies, the central bank said.
Domestically, measures to contain the spread of the virus have had a significant impact on economic activity and domestic demand has fallen considerably as underlying data for inflation are showing a declining trend and there are no inflationary pressures forecast in coming months.
“In this context, CPM (monetary policy committee) considers it necessary to make monetary conditions easier in order to guarantee that inflation converges to the goal of 4.0 percent in the relevant monetary policy horizon,” BCP said.
It added new data along with local and international information will determine the next policy steps.
On April 21 the executive board of the International Monetary Fund approved the disbursement of US$274 million for Paraguay under its Rapid Financing Instrument to help the country meet “urgent” balance of payment needs, preserve resources for health and social safety net spending and to catalyze multilateral donor support.
stemming from the outbreak of the COVID-19 pandemic.”
In addition to its rate cuts and liquidity support, Paraguay has allowed banks to restructure loans to private sector companies that are facing difficulties and postponed collection of taxes and user fees for 2 months.
Prior to the outbreak of the coronavirus, Paraguay was on track to recover from a weather-related recession in 2019 but its economy is now seen shrinking by around 1 percent this year and the fiscal deficit is seen rising to 4.5 percent of GDP.
A temporary widening of the deficit is considered appropriate by the IMF but once the crises abates, the budget deficit will have to be narrowed and the country should re-establish its fiscal rule, which has anchored macroeconomic stability in the past 5 years.
