Interest rate and inflation in Paraguay

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An increase in prices over a certain period of time is referred to as inflation. In most countries, the respective central bank is responsible for this increase in prices. The key interest rate is also determined by these same central banks. Both instruments work hand in hand and thereby control the economy.

For the euro zone, this would be the European Central Bank (ECB), for the U.S. the Federal Reserve (FED) and for Paraguay the banco central del Paraguay (BCP).

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New minimum wage since July 2023

As of July 1, 2023, Paraguay has increased the minimum wage by 5.1% to Gs 2,680,373 which is slightly more than the cumulative inflation through July of 3.5% price increase.

The new minimum wage is Gs 2,680,373 per month (approx. USD 380) or Gs 103,066 per day. Thus, the wage increase of +5.1% is much more modest than last year’s +11.4%. This is in line with the Central Bank’s expectation that inflation in Paraguay is now under control. For this year, the BCP expects prices to rise by around 4.1%.

Rate pivot in August; central bank lowers key rate

Due to the low inflation in Paraguay this year and the good growth of the economy of around +4.5%, the central bank has lowered the interest rates in Paraguay by 0.25% to now 8.25% on 23.8.2023.

This is an important turning point after the massive increase in interest rates in Paraguay 2021 – 2022 from originally 0.75% to 8.50% in September 2022. For a full 10 months, this rate then remained unchanged until it was lowered on August 23, 2023. While this is a very small step, it could also be a sign of a trend reversal in other countries. There will certainly be a delay, as large economic blocs such as the EU or the U.S. have also raised their interest rates later (and less decisively). However, a trend is discernible.

Interest rates and real estate

The interest rate has many effects on the economy. But hardly any market is more affected than the real estate market. In Germany in particular, you can see very clearly at the moment how even a relatively small rise in interest rates has led to a massive market collapse in the real estate sector.

Why is that? If interest rates rise, loans become more expensive and the burden on households increases. This also reduces the maximum amount that a household can finance. As a result, house prices almost inevitably have to fall so that people can still afford these properties even with higher interest rates.

If interest rates fall, then there is the opposite effect, with property prices rising. So if this trend continues in the coming months, then currently would be a very good opportunity to invest in real estate in Paraguay. A good way to do this is explained in this article.

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