The Central Bank of the Dominican Republic (BCRD), at its monetary policy meeting in November 2021, decided to increase its monetary policy interest rate by 50 basis points, from 3.00% per annum to 3.50% per annum. In this way, the rate of the permanent liquidity expansion facility (1-day Repos) increases from 3.50% per year to 4.00% per year and the rate of remunerated deposits (Overnight) from 2.50% per year to 3.00% per year.
This decision regarding the benchmark rate is based on a comprehensive assessment of the impact of COVID-19 on global production and increased external inflationary pressures. In this order, price dynamics continue to be affected by more persistent supply shocks than expected, associated with higher prices of oil and other important raw materials for local production, as well as the increase in global freight costs due to shortages. of containers and other distortions in supply chains.
In particular, the monthly variation of the consumer price index (CPI) in October was 0.64%, while the accumulated inflation during the first ten months of 2021 was 6.56%. On the other hand, core inflation, which excludes the most volatile components of the basket, reached 6.31% year-on-year in October 2021, reflecting second-round effects due to higher production costs associated with higher inflationary pressures of external origin.
Going forward, the BCRD forecasting system indicates that, in an active monetary policy scenario, year-on-year inflation (variation of the last 12 months), which stood at 7.72% in October 2021, would converge to the target range of 4% ± 1% during the second half of 2022, at a more gradual rate than originally planned.
In this context, considering the good rhythm of the economic recovery and the substantial improvements in the labor market, the Central Bank began in August of this year a gradual plan to normalize its monetary policy. The resources granted during the pandemic are ordered in an orderly fashion, to the extent that companies and households are repaying the loans granted through different liquidity facilities at maturity.
In this second stage, the BCRD decided to increase the monetary policy rate (MPR) by 50 basis points in order to preserve price stability, ensuring that the inflation rate converges in the monetary policy horizon. Likewise, the persistence of exogenous shocks on domestic inflation will continue to be evaluated in order to take the additional monetary measures that are necessary to keep the inflation expectations of economic agents anchored.
In the international environment, the economic outlook remains positive, although the uncertainty generated by the rate of global COVID-19 infections and disruptions in supply chains persists. In that sense, Consensus Forecastsit revised the pace of global expansion slightly downwards for 2021, to 5.6% in its November report.
For the United States of America (USA), our largest trading partner, the most recent projections ofConsensus They point to a growth of 5.5% for 2021, being revised downwards due to the uncertainty caused by the “bottlenecks” in the production and transport of goods.
Indeed, the US economy expanded 4.9% year-on-year in the third quarter, while inflation reached 6.2% in October, above its 2.0% target and being the highest inflation in the last three decades. In this context, the Federal Reserve began the gradual withdrawal of its monetary stimulus, reducing the pace of monthly asset purchases, while market analysts expect that next year a process of increasing the federal funds rate will begin. , which is currently in the range of 0.0% and 0.25% annually.
On the other hand, economic activity in the Euro Zone would expand by 5.0% in 2021, according to Consensus, while inflation stands at 4.1%, highlighting the variation in prices in Germany of 4.5%, the highest in 28 years.
Meanwhile, the European Central Bank has maintained the overnight deposit rate at -0.50% per year, while it announced that it has begun to moderate the pace of the emergency program for the purchase of financial assets due to the pandemic, although it will continue with the rest of the programs for the provision of liquidity and long-term refinancing operations for the private sector.
Growth prospects for Latin America continue to improve, with an expansion of 6.6% being estimated in 2021, according to Consensus. On the other hand, most of the central banks with inflation targeting schemes in the region (Brazil, Chile, Colombia, Mexico, Paraguay, Peru and Uruguay) have increased their reference interest rates, in response to higher rates and inflation expectations.
Regarding raw materials, the price of a barrel of intermediate Texas oil (WTI) has increased in recent months, going from an average of US $ 72 in September to an average of US $ 81 during October and November, due to restrictions on world oil production and higher world demand.
In this context, the specialized organizations revised up their oil price projections for this year 2021, although they foresee a gradual moderation during 2022, as world supply normalizes in the face of an increase in global production and the use of strategic reserves. in several of the advanced economies.
In the domestic environment, the process of recovery of aggregate demand has taken hold, highlighting the growth of the monthly economic activity indicator (IMAE) of 10.6% year-on-year during the month of September. The dynamism of the Dominican economy has allowed the accumulated expansion during the first nine months of the year to reach 12.7%, influenced by the good performance of sectors with a high productive chain such as construction, local manufacturing, free zones, commerce, as well as for the recovery of the hotel, bar and restaurant sector.
In this context of a faster-than-expected economic reactivation, economic growth projections point to an expansion that would be around 10.7% during this year 2021. These positive prospects for the Dominican economy are supported by the significant recovery of domestic demand, important advances in the national vaccination plan and the gradual improvement in tourism, estimating the arrival of some 5.0 million non-resident visitors in all of 2021.
Likewise, the implementation of the monetary stimulus since the beginning of the pandemic has been successful, by fostering greater dynamism of private credit in national currency, which maintains an expansion of around 10% year-on-year in November. It is important to note that in recent months there has been a reactivation of public investment, which is expected to continue during the coming quarters and which will contribute to the consolidation of the economic recovery.
In the external sector, the good performance of remittances continues, which grew 34.4% during January-October 2021 and it is estimated that they would exceed US $ 10 billion by the end of this year; while total exports expanded 23.3% year-on-year during January-September 2021. International reserves remain at historically high levels, above US $ 12.5 billion at the end of October, equivalent to 6.3 months of imports and 13.5% of domestic product gross (GDP), which exceeds the metrics recommended by the IMF. These factors have contributed to maintaining the relative stability of the exchange rate, reflected in a year-on-year appreciation of approximately 2.8%.
The Central Bank of the Dominican Republic reaffirms its commitment to lead monetary policy towards the achievement of its inflation target and the proper functioning of the financial and payment systems. In this sense, special monitoring will be given to the macroeconomic environment and the evolution of inflationary pressures, in order to adopt the necessary measures in the face of factors that may put price stability at risk.
