Inflation and interest rate in Paraguay 2022
In 2022, the increase in prices is a major issue worldwide. The largest economy in the world (USA) reports a year-on-year increase in prices of around 9.1%. These are the official figures. According to the website: http://www.shadowstats.com, it should even have been 16.8% by July.
In the EU, things look even bleaker. According to the official figures from the Frankfurt-based European Central Bank, inflation through July is as high as 9.8%. Many EU citizens would estimate the perceived rise in prices to be much higher.
By comparison, Paraguay is doing comparatively well, with 8,1% higher prices in 2022.Read more
Interest rates, FED and inflation
An increase in prices over a certain period of time is referred to as inflation. In Western, the respective central bank is usually responsible to keep inflation in check.
The central bank in the U.S. is called the Federal Reserve (FED) and is responsible for keeping prices stable. This happens in two ways. On the one hand, the “FED” can inject fresh money into the economic cycle (lowering interest rates) and, on the other hand, withdraw it again (raising interest rates).
In the course of the pandemic, a very, very large amount of fresh money was pumped into the economy starting in 2020. This resulted in increased consumer demand. Companies such as Amazon experienced a real boom as a result. At the same time, the lockdowns produced a smaller amount of goods and services. Whenever a larger demand meets a smaller supply, inflation occurs.
The FED is also aware of this and therefore the key interest rate was raised from 0.25% in April 2022 to currently ~4%. This will slow down a further increase in prices by a decrease in demand. However, less demand means less sales for the economy and therefore the growth of the economy is reduced. This is an important detail to remember.
In the EU, inflation is even higher compared to the US. The interest rate was 0 or negative for a very long time. Currently it is an incredible 2.00%. For savers, this means a net loss in 2022 of at least 8%.
In Paraguay, the key interest rate was already raised consistently from August 2021. From a starting point of only 0.75% (August 2021). The current key interest rate is 8.50% in Paraguay.
8.50% interest rate in Paraguay
The Central Bank of Paraguay (BCP) acted according to the textbook of economics. In the course of the pandemic, the interest rate was lowered sharply, thus stimulating the economy. After the end of the pandemic, this “cheap money” was withdrawn from the economy again as early as 2021, thus stabilizing the currency and prices in the long term.
For 2022, this means a low growth of the economy of only +0.4% according to the BCP forecasts. However, the interest rate adjustment has been completed, inflation is under control and economic growth of around 5% is therefore calculated for the coming year 2023.
Remember; the interest rate is supposed to be the rate of inflation +1%
A good time for investments in Paraguay
Due to this very reasonable economic policy, the general conditions in Paraguay are comparatively quite good. Especially for investors from the EU there are good yield possibilities even with very simple investment forms like a time deposit (savings) at a bank. Depending on the amount of the investment and the bank, returns of up to 8,25% are possible. In the case of cooperatives, even significantly more. Also corporate bonds or yield real estate are currently very interesting with 8-14% yield in a stable currency.
More current information about investing in Paraguay can be found in the book “Investors guide Paraguay” with real and current figures!