The Central Bank of Paraguay (BCP) has reason to celebrate, at least in numbers. April inflation stood at 2.3%, nearly two percentage points below the 4.0% target, and core SAE inflation registered only 1.5%. After cutting the TPM from 6% to 5.5% between January and February, the monetary authority interprets the data as a sign of successful monetary policy transmission. But according to analyst Alejo García, the diagnosis is mistaken.
In a recent article, García compares the BCP's situation to that of Spanish explorer Alejo García, who in 1524 landed in Paraguay in search of El Dorado and accidentally found the territory. “The BCP sought to lower inflation with monetary policy and stumbled upon low inflation due to exchange rate appreciation, and celebrates as if it were a deliberate achievement,” he writes.
According to García, Paraguayan inflation did not fall due to precise calibration of domestic financial conditions, but because the guarani appreciated 23% against the dollar since July 2025. This appreciation, he argues, does not stem from improved macroeconomic fundamentals, but from transitory capital flows and operational frictions in the liquidity market, amplified by the BCP's passive design.
The analyst points out that the interest rate transmission channel is broken. The TIB in March stood at 5.34%, below the TPM of 5.50%, while the yield on the LRM – a monthly liquidity management instrument – was 5.87%. This creates an “inverted corridor,” a technical symptom of dysfunction: market rates do not converge to the policy rate because the BCP lacks instruments to force that convergence.
“The BCP's toolkit is incomplete,” says García. The authority operates with only one fine-tuning tool, the LRM, auctioned once a month. It has no weekly or daily open market operations, no active REPOs, no FX swaps, and no operational overnight credit facility. When a bank faces an intraday liquidity deficit, its options are limited: either borrow funds in the interbank market – fragmented and with high spreads – or sell dollars. Small banks, without access to guaranis, sell dollars in large volumes, putting upward pressure on the currency for operational, not fundamental, reasons.
The evidence, according to García, is clear: daily balances in the Permanent Deposit Facility (FPD) doubled between 2024 and the first quarter of 2026, reaching record levels near PYG 4 trillion. In the same period, the guarani appreciated 23%. “This simultaneity is not a coincidence,” he writes. “When liquidity gets trapped in the system, operational deficits are closed by selling dollars, and this selling pressure appreciates the currency.”
The 2.3% inflation, he concludes, is largely an imported deflation via the exchange rate, not the result of effective monetary policy. “It is an exchange rate lottery. And, like any lottery, it eventually reverses.”