South America’s Top Rate Cutter Is in No Rush to Raise It
(Bloomberg) -- Paraguay will refrain from lifting borrowing costs from record lows until policy makers are sure the recovery has taken hold and even then the path to neutral rates “will be a gradual process,” according to its central bank chief.
“Given that inflation expectations are anchored, that gives us sufficient room to continue supporting the economy,” Jose Cantero said in a video interview on Thursday.
Inflation, now at 2.5%, isn’t expected to approach the central bank’s 4% target until well into 2022, he said. Analysts surveyed by the central bank last month expect policy makers will lift the benchmark rate to 1.25% from the current 0.75% by year-end and 1.75% in 2022. Cantero declined to comment on what the central bank considers a neutral rate level.
Cantero, like his counterparts worldwide, is facing the critical issue of how to time the withdrawal of loose monetary policy. Fiscal stimulus and optimism fueled by the rollout of vaccines has revived investor jitters about inflation and sent U.S. Treasury yields soaring. Paraguay’s biggest trading partner, Brazil, is expected to tighten later this month.
The central bank under Cantero cut its key rate by 325 basis points in the space of just four months, the biggest cumulative easing last year among South American countries with inflation targeting regimes, and freed up liquidity of roughly $3.8 billion, or 11% of gross domestic product, including loans to the Treasury and lower deposit reserve requirements. Congress also authorized the government to borrow $1.6 billion to spend on the pandemic.
Paraguay responded to the crisis “like an investment grade country“ and its economy probably shrank less than 1% in 2020, Cantero said. Major credit rating companies have Paraguay one notch below investment grade.
On The Mend
Paraguay’s still limited integration with the global economy is an advantage during the current bout of financial market volatility triggered by rising U.S. bond yields, Cantero said.
“Our economy is back on its feet and on track to grow 4%,” Cantero said. The central bank expects construction, manufacturing and retail will underpin the recovery this year, he added.
The landlocked farming and ranching nation could grow at its fastest pace since 2017 this year thanks to that flood of stimulus and a rebound in commodities prices. The government’s decision to lift many lockdown measures last year also helped boost the economy, though at the cost of higher infection rates.
Latin America is one of the region’s hardest hit by the pandemic, and many countries are struggling to obtain enough vaccines. Paraguay has received just 4,000 doses for its 7 million people and local media has reported shortages of critical drugs and medical supplies in public hospitals.
In its Article IV consultation with Paraguay, the IMF warned against withdrawing fiscal support prematurely in case the pandemic worsens or bad weather harms the economy.
The central bank flagged Covid-19 as a risk to the economy in its Feb. 22 policy meeting, where it kept its key rate at 0.75% for an eighth consecutive month.
That growth outlook is helping Paraguay’s currency outperform South American peers. The Guarani gained almost 0.2% to close at 6,669 per U.S. dollar Thursday, for a year-to-date gain of 3.6%, according to data compiled by Bloomberg.
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