In recent days there has been information that not only points in the direction of greater monetary flexibility, but also reinforces it
Knowing that expertise always speaks in the decisions of the Dominican monetary authority, on September 24 we had planned additional rate reductions by the Central Bank to the one arranged on August 29, when it lowered its monetary policy rate by 25 basis points. , decreasing from 7.00% to 6.75% annually. “There are well-founded reasons that give the Central Bank room to make a new move to lower its monetary policy rate,” we said.
And just two days later, in a statement to report the behavior of the economy as of August, the Central Bank confirmed its intention to order new rate reductions, stating that the reduction of 50 basis points in the Reserve’s monetary policy rate Federal, resolved on September 18, “provides greater freedom to implement monetary policies at the domestic level that support economic growth without compromising the inflationary goal.”
We relied on two reasons to foresee new moves towards the reduction of the domestic monetary policy interest rate: that the reduction in the rate ordered by the Federal Reserve had been double the reduction that the Central Bank had previously made, which was 25 basis points and that the domestic inflation rate was within the monetary policy target objective, in a growth scenario without the threat of overheating of the economy.
Both factors, we explained, gave greater room to the domestic monetary authority to continue reducing the interest rate.
And in recent days there has been information that not only pointed in the expected direction, but reinforced it: US inflation, measured by the personal consumption expenditure (PCE) deflator, surprised downwards in August, which clears the way for the Federal Reserve to continue cutting interest rates. The general PCE deflator registered an increase of 2.2% year-on-year in August compared to 2.5% in July and the expected 2.3%.
Hence, the market is not only assuming that the Federal Reserve is going to lower the rate again in November, but there are even those who think that it could do it again in a big way, with another reduction of 50 basis points.
According to the FedWatch tool, which captures the ‘dance’ of futures, operators already give more than 50% probability of a 50 basis point cut in November. Until now that percentage remained just below 50%.
“This PCE report keeps hopes alive for a 50 basis point cut in November, but payrolls remain the key going forward,” summarizes Ole S. Hansen, strategist at Saxo Bank, while Jesse Cohen, analyst at Investing markets, considers that “the cold inflation data supports another 50 basis point rate cut in November.”
In other words, all paths led, without the risk of surprises that would cause us to lose our way, to greater flexibility in monetary policy. So yesterday’s decision by the BC to lower the rate by another 25 basis points should not have taken the market by surprise and it is expected that bank rates will begin a gradual downward process this month.
