Paraguay Central Bank Holds Key Rate on ‘Prudent’ Strategy

(Bloomberg) -- Paraguayan policymakers kept their benchmark interest rate at 4.75% on Friday, reiterating that its current level is the “most prudent” strategy amid slowing growth and tame inflation.

In an interview a day before the monetary policy meeting, central bank chief Jose Cantero said that the key rate was at “neutral levels” taking into account the economy and consumer prices.

The central bank of the South American country, landlocked between Brazil, Argentina and Bolivia, cut its benchmark rate twice this year to an eight-year low of 4.75% as it seeks to revive growth. Paraguay’s once high flying economy has slowed due to a drought that slashed the soybean harvest and recession or low growth in its bigger neighbors. The central bank will update its GDP forecast, now at 3.2%, in July.

Real Exports

Exports of Brazilian banknotes that accumulate in Paraguay from commerce in border cities is returning to normal, said Cantero, who put the value of those remittances at about $2.8 billion a year.

For years, Paraguayan banks sold physical reals to Brazilian banks who would arrange to have them flown home. However, that trade was temporarily disrupted last month when Brazilian authorities started investigating Banco Paulista, a major currency buyer, for possible ties to the Carwash corruption scheme.

The central bank is scrutinizing the Brazilian real export businesses of local banks Banco Continental, Banco Basa and Banco Atlas, Cantero said. The process is not an investigation, but rather “a focused supervision to obtain more information about the business” that is in a preliminary stage, he added.

Banco Atlas returned to the real export market this week after it was informed as part of an ongoing regulatory process that it had “reasonable controls” in place, the bank said in an emailed statement. Banco Basa’s real exports are not subject to special supervision by the central bank, general manager Fernando Paciello said in an emailed statement.

Banco Continental, which continues to export reals to its Brazilian subsidiary NBC Bank, is providing information requested by the central bank, board member Fernando Herrero said in a telephone interview. It could take a couple of months for the real export market to recover, he said.

Merchant houses in border towns like Ciudad del Este go to local banks to exchange the reals they receive from Brazilian shoppers for dollars to pay foreign suppliers. The disruption to the real market was an added headache for retailers already suffering from a weak Brazilian economy and currency, said Herrero, adding that some retailers stopped accepting reals altogether.

Paraguay has engaged with its neighbors on the topic given its impact on retailers.

“We are going to work with the central bank of Brazil and other central banks in Mercosur to have better, safer and more transparent international standards” for currency exports, Cantero said.

To contact the reporter on this story: Ken Parks in Montevideo at kparks8@bloomberg.net

To contact the editors responsible for this story: Juan Pablo Spinetto at jspinetto@bloomberg.net, Robert Jameson, Carolina Millan

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