Market News

By Ken Parks

(Bloomberg) -- Paraguay’s central bank sees its current benchmark interest rate of 6% slowing price increases to its new target as soon as the middle of 2026, Chairman Carlos Carvallo said in an interview. 

Carvallo, 56, didn’t rule out hiking or easing rates if needed to reach the new 3.5% inflation target, while the monetary authority estimates prices will rise 3.7% next year, a tick higher than this year. 

“With the information we have today the monetary policy rate is at a level where we feel comfortable it will take inflation to the central bank’s new target,” Carvallo said in an interview from the capital Asuncion. 

Although Carvallo sees no imminent policy changes, analysts surveyed by the central bank this month see board members cutting rates by half a percentage point next year to 5.5%.

Carvallo has kept borrowing costs unchanged since April with inflation logging 20 consecutive months in a tight range around the previous 4% target. 

Paraguay, a land-locked South American country of 6.1 million people, is seeking lower inflation as some regional peers are struggling to contain currency volatility. Latent inflationary risks led Uruguay to raise borrowing costs for the first time in two years this month, while Chile signaled it might pause further rate cuts due to high inflation.

Brazil is in full tightening mode to cool an overheated economy and stem a run on the currency sparked by the government’s reluctance to trim a fiscal deficit approaching 10% of gross domestic product. The selloff in Brazilian assets in recent weeks is emerging as a cautionary tale for the region, which Colombia’s central bank cited as the reason it slowed the pace of rate cuts after its currency lost more than 12% this year.

Paraguay’s currency, the guarani, has fared better than most of its regional peers this year, only losing 7% against the dollar versus a more than 20% decline for Brazil’s real as well as exchange rate woes in neighboring Uruguay and Bolivia. 

Paraguay’s government has pledged to lower its fiscal deficit from an estimated 2.6% of GDP this year to 1.5% in 2026. The nation’s sovereign dollar bonds have returned 2.1% in 2024, compared to a 12.5% gain for Latin American sovereign debt, according to the Bloomberg EM USD Sovereign index.

The central bank sees growth slowing on the margin to 3.8% next year, from an estimated 4% in 2024. That forecast includes the negative impact on trade with Brazil due to the slide in the real and the expected recovery in Argentina’s economy in 2025, Carvallo said.

Paraguay has built buffers against regional headwinds in recent years thanks to credible fiscal and monetary policy, a free-floating currency and a more diversified economy, Carvallo said.

“We have an economy that is much more resilient and decoupled from the problems in the region whether they be from Argentina or Brazil,” he said.

Since late October, the central bank sold more than $181 million dollars on the local currency market to smooth volatility.

“We had to intervene a few weeks, but today the exchange rate has recovered and is following its normal trend,” Carvallo said.