PARAGUAY – BCP on hold at 5.50%, as widely expected

At today’s monthly Monetary Policy meeting, the BCP unanimously left the policy rate unchanged at 5.50% for the third consecutive month, maintaining a neutral monetary policy stance. The decision, in line with our expectations and market consensus, reflects elevated uncertainty linked to geopolitical tensions in the Middle East, which have recently triggered a sharp rise in energy prices.

The Committee noted that short-term indicators continue to point to solid economic momentum, consistent with BCP’s projected GDP growth of 4.2% for the year. Regarding inflation, recent monthly readings have been largely driven by volatile components, particularly the increase in fuel prices, reflecting higher international oil prices. In this context, year-on-year inflation is expected to remain temporarily below target, converging to 3.5% in the second half of the year. Following today’s decision, we estimate that the one-year ex-ante real policy rate remains at 2.0%, placing it comfortably within the BCP’s estimated neutral real rate range of 1.3%–2.6%.

In the external environment, uncertainty persists regarding the duration of the conflict in the Middle East, compounded by expectations of a potential increase in interest rates by the Federal Reserve.

As usual, the Committee also emphasized that it will continue to closely monitor risks stemming from the external environment, in order to assess their implications for the inflation path and take the necessary measures to ensure convergence to target within the monetary policy horizon.

Our view: We expect the policy rate to remain on hold at 5.50% through the remainder of 2026. However, risks are skewed to the upside, driven by firmer Brent prices and their likely pass-through to inflation, in the context of activity persistently outperforming. That said, still-benign core inflation dynamics support our baseline scenario. The next monetary policy meeting is scheduled for June 22.