Paraguay central bank readies rate hikes as economy rebounds

Fri Dec 21, 2012 3:39pm EST

Related Topics

* Growth picking up in soy-, beef-exporting country

* Inflation expected to near 7.5 pct upper limit in 2013

By Daniela Desantis

ASUNCION, Dec 21 (Reuters) - Paraguay's central bank will likely start raising interest rates next year as the country's nascent economic recovery heightens inflationary pressures, the president of the monetary authority said on Friday.

The soy-exporting nation's small economy grew 2.0 percent in the third quarter from a year earlier and 3.1 percent versus the second quarter, signaling the start of a rebound, official data showed earlier this week.

Officials expect gross domestic product (GDP) to expand by at least 9.5 percent in 2013 following this year's contraction, boosted by a record soybean harvest and steadily improving beef exports.

"In light of the dynamic that we're seeing, there will likely be signs from the central bank at the start of next year," central bank chief Jorge Corvalan told Reuters.

"The strongest signal will be on interest rates, but other tools could also be used such as foreign exchange operations (or) reserve requirements," he said.

Policymakers have kept the country's benchmark lending rate on hold at 5.5 percent since September. It has been cut 300 basis points since August 2011 in response to the farm sector's drought-related downturn.

Despite this week's rosier data, the central bank still expects GDP to shrink 1.5 percent this year although the forecast will be revised in the coming days and "won't be quite so negative," Corvalan said.

Inflation is expected to close 2012 at about 4 percent, but prices look set to rise more briskly next year and come close to the upper end of the central bank's target range of 7.5 percent, he said. (Writing by Helen Popper; Editing by David Gregorio)

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