Santo Domingo – The Central Bank of the Dominican Republic (BCRD)decided to increase its monetary policy interest rate by 75 basis points, from 6.50% to 7.25% per year.
In this way, the rate of the permanent liquidity expansion facility (1-day Repos) increases from 7.00% to 7.75% per year and the interest-bearing deposit rate (Overnight) from 6.00% to 6.75% per year.
This decision is based on an exhaustive evaluation of the recent behavior of the world economy and its impact on inflation, influenced by geopolitical conflicts and the global cost shock.
In that order, the dynamics of prices continue to be affected by external factors that have been more persistent than expected, associated with the extraordinary increase in the prices of oil and other raw materials, as well as the high costs of international container transport and other disruptions in supply chains.
In addition to these external components, in recent months internal pressures have begun to be verified to the extent that aggregate demand has recovered notably in relation to pre-pandemic levels and the rates of various services in the economy are adjusted.
In particular, the monthly variation of the consumer price index (CPI) stood at 0.49% during May 2022, while year-on-year inflation, that is, in the last 12 months, moderated slightly to 9.47%.
On the other hand, year-on-year core inflation, which excludes the most volatile components of the basket, reached 7.29% in May, reflecting second-round effects on production associated with external supply shocks and internal demand pressures.
To help counteract inflationary pressures, the Central Bank has significantly reduced the excess liquidity of the financial system, through open market operations and the gradual return of the resources that had been granted during the pandemic.
These measures have succeeded in accelerating the monetary policy transmission mechanism, contributing to the adjustment in domestic interest rates and a significant moderation in the growth of monetary aggregates.
Liquidity control measures and gradual increases in the monetary policy rate have reversed the expansionary stance implemented during the pandemic, which would facilitate a gradual convergence of inflation to the target range of 4% ± 1% during the policy horizon. monetary.
The monetary normalization process seeks to avoid risks of overheating of the economy that deepen the inflationary pressures of exogenous origin and of internal demand, as well as a deterioration of the differential with respect to external interest rates that could cause volatility in the flow of capital.
In this active monetary policy scenario, the BCRD will be continuously monitoring global financial conditions and the expectations of economic agents, in order to take the necessary measures to maintain price stability.
In the international environment, uncertainty remains high due to the war between Russia and Ukraine, which has caused a deterioration in the global economic outlook. In this sense, the forecasts for world growth continue to be revised downwards to 2.9% in 2022 according to Consensus Forecasts, while international inflation projections continue to increase.
In the United States of America, our main trading partner, growth has moderated to 3.5% year-on-year in the first quarter of 2022, equivalent to an annualized quarter-on-quarter contraction of -1.6%. On the other hand, year-on-year inflation in that country reached 8.6% in May, the highest in four decades and more than four times higher than the 2.0% target for average inflation.
In this context, the Federal Reserve (Fed) increased the reference rate by 75 basis points in June, accumulating an increase of 150 basis points this year and indicating that they would be making additional adjustments in the remainder of 2022.
In particular, market analysts expect that the reference rate will be increased again by 75 basis points at the meeting in July. Similarly, other advanced economies such as Canada and the United Kingdom accumulate increases in their monetary policy rates of 125 basis points and 115 basis points, respectively.
As for the Eurozone, growth forecasts have also been revised downwards, with an expected expansion of 2.8% in 2022 according to Consensus Forecasts; while year-on-year inflation stood at 8.1% in May, the highest in the history of this bloc of countries.
In this context, the European Central Bank (ECB) announced that it would increase the monetary policy rate by 25 basis points at its next meeting and that it would probably make a larger increase in September to promote a reduction in inflationary pressures. .
