PARAGUAY – The BCP cut the policy rate by 25 bps for the second consecutive month to 5.50%

At today's monthly Monetary Policy meeting, the Central Bank unanimously decided to cut the monetary policy rate (MPR) by 25-bps, to 5.50%, marking the second consecutive cut. The cut was in line with our call, but surprised market consensus, which anticipated an on-hold decision.

The MPC highlighted that inflationary pressures have eased in recent months, primarily due to lower inflation in goods, amid a stronger PYG. Inflation is expected to continue below the target for most of 2026, converging to the target towards the end of the year. Additionally, the Committee highlighted the consolidation of inflation expectations at the target of 3.5% across all horizons. After today’s decision, we estimate the one‑year ex‑ante real policy rate at 2.00%, remaining within the BCP’s neutral real interest rate range (1.3%–2.6%).

Furthermore, the MPC noted that economic activity remained robust in December, in line with an estimated GDP growth rate of 6.0% for that year. For 2026, the BCP´s GDP growth forecast stands at 4.2%, it means around potential.

Regarding the external scenario, the Federal Reserve remained on hold in January, as expected, while markets anticipate further cuts throughout the year.

Our take: Today's decision was in line with our call. We expect a further 25 basis point cut at the next monetary policy meeting on 20 March, which is consistent with a terminal rate of 5.25%. Consistently, we estimate that the nominal neutral interest rate range is between 4.8% and 6.1%, with a median value of 5.2%. However, recent pressures on Brent oil prices could lead to a pause in the easing cycle.