Asuncion: As a result of the normalization process of the country’s monetary policy, which has been verified with the increase in the reference interest rate of the Central Bank of Paraguay (BCP) in recent months in order to curb inflation, the average active interest rate in the banking system has increased.
For bank overdrafts and credit cards, the average interest rate is 14.04%; 1.36 percentage points over the same month in 2021.
Looking at the analysis by segment of credit shows that in March, with the exception of lending rates on home loans and overdrafts, all other segments recorded both monthly and annual interest rate increases. The same situation occurs with foreign currencies, where the exchange rate effect has had a significant impact.
Consulting firm Mentu specifically highlights the annual increase in consumer loan rates of more than 2 percentage points. However, despite this scenario, the default rate in the industry is below last year, which would reflect the growth of the portfolio.
This increase in the cost of money raises questions such as: Why do interest rates rise in an inflationary context? And in the context of a rapidly paralyzed economy, doesn’t the rise in interest rates imply more inflation?
Much of the inflation is imported (energy and food) so the BCP tries to keep the US dollar stable so it doesn’t explode and intervenes by selling USD.
The increase in commodity prices is the fastest in the last 40 years as a result of the war between Russia and Ukraine. Almost every country in the world has the same problem. It is worth remembering that inflation mainly affects the poorest, whose income mostly goes to food.
The increase in food and fuel prices accounts for more than 70% of Paraguay’s inflation.
Although the causes lie in internal energy and food price increases, there are second-round effects and impacts on expectations that call for the monetary policy interest rate to be adjusted to a level consistent with future inflation targeting.
“If we have a hard-to-fight fire (inflation), one of the first things to do is to stop it from spreading any further, which is why the policy rate is adjusted. It is necessary but not sufficient, in this scenario other measures are required that go beyond those of the BCP, such as B. supporting fruit and vegetable producers to increase supply,” explained economist Jorge Garicoche.
For his part, the chairman of the Supermarket Chamber, Alberto Sborovsky, expressed his opinion in the same direction: “Productivity and efficiency must be increased. Raising interest rates is not enough, although it is one of the things that is in the manual.”
Weekly newspaper / El Nacional / featured image archive
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