Paraguay’s slowing consumer prices and waning external inflationary risks gives policymakers room to consider cutting interest rates this year, according to President-elect Santiago Peña’s nominee to lead the central bank.
(Bloomberg) — Paraguay’s slowing consumer prices and waning external inflationary risks gives policymakers room to consider cutting interest rates this year, according to President-elect Santiago Peña’s nominee to lead the central bank.
Policymakers have kept the benchmark interest rate at a 12-year high of 8.5% since September 2022 after tightening by 775 basis points to contain soaring consumer prices. Annual inflation in July slowed below the central bank’s 4% target for the first time in more than two years, while inflation expectations remain anchored at that level.
“Today, conditions are much better than a few months ago to make a decision like that,” Carlos Carvallo, whose career includes a five-year stint on the central bank’s board of directors, said in an interview.
South American central banks in Brazil, Chile and Uruguay started lowering interest rates this year thanks to cooling inflation. Other inflation-targeting central banks in the region like Paraguay and Peru are also expected to loosen monetary policy before the end of the year.
Read more: Brazil Vows Additional Half-Point Rate Cuts in Surprise Move
External risks including commodity prices and financial market volatility will influence the speed at which Paraguay unwinds its contractive policy stance, Carvallo said.
“If those risks dissipate, maybe we can go faster. If those risks are still present, this process will most probably be more gradual,” he said.
Peña will submit Carvallo’s nomination to the Senate for approval when he starts his five-year term Aug. 15. The new government will get a tailwind from low inflation and an economy that the International Monetary Fund forecasts will grow 4.5% in 2023. However, Peña faces the challenge of squaring expensive campaign promises with the fiscal austerity needed to narrow the deficit to 1.5% of GDP by the end of 2026.
Paraguay can aspire to inflation rates like those of more developed countries thanks to the credibility of its monetary and fiscal policies, Carvallo said.
With that in mind, the 54-year-old economist wants the central bank to revive pre-pandemic plans to study adopting a lower inflation target once interest rates and the fiscal deficit come down.
“It’s healthy to resume the discussion about imposing stricter goals with respect to certain key indicators like inflation,” Carvallo said. “I see it as feasible, but I also see it subject to a rigorous institutional debate.”
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