The central bank of the Dominican Republic (BCRD) reported today that, at its meeting of monetary politics July, decided to increase its interest rate of monetary politics in 50 basic points: from 7.25 to 7.75% per year. In this way, the rate of the permanent liquidity expansion facility (1-day Repos) went from 7.75 to 8.25% per year and the interest-bearing deposit rate (Overnight), from 6.75 to 7.25% per year.
This decision registers another increase in the rate of monetary politics after in June the central bank decided to increase it in 75 basic points, from 6.50 to 7.25% per year.
“This decision is based on a thorough assessment of the recent behavior of the world economy and its impact on inflationinfluenced by geopolitical conflicts and the global cost shock”, the institution argued today in a press release announcing the recent increase.
“In that order,” he added, “price dynamics continue to be affected by external factors that are 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, the inflation domestic demand has been influenced by the second-round effects of these external components, to the extent that aggregate demand has recovered significantly in relation to pre-pandemic levels.”
The central bank At the end of 2021, a process of monetary normalization began through increases in its interest rate. monetary politics and the reduction of the excess liquidity of the financial system, with the objective –as he explained– of counteracting inflationary pressures, avoiding risks of overheating of the economy, as well as a deterioration of the differential with respect to external interest rates.
“After these measures, there has been a significant increase in the interest rate passive, while the increase in interest rate activity has been more gradual, remaining below pre-pandemic levels. Likewise, a significant moderation has been verified in the growth of monetary aggregates”, indicated the bank.
In particular, the monthly variation of the consumer price index (CPI) stood at 0.64% during June 2022, while the inflation year-on-year, that is, in the last 12 months, it stood at 9.48%, moderating with respect to its highest level reached in 2022 of 9.64% in April, detailed the central bank.
“Similarly, the inflation interannual underlying, which excludes the most volatile components of the basket, begins to show signs of moderation, going from 7.25% in the month of May to 7.11% in June”, he indicated.
He added that the recent measures implemented by the central bank have reversed the expansionary monetary stance adopted during the pandemic, which would facilitate a gradual convergence of the inflation to the target range of 4% ± 1% over the horizon of monetary politics. “In this active scenario of monetary politicsthe 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 global economic projections.
The issuing entity reiterated that in Latin America, almost all the central banks of the region accumulate significant increases in their reference rates from 2021 to face the high levels of inflationas is the case of Argentina (2,200 basis points), Brazil (1,125 basis points), Chile (925 basis points), Paraguay (725 basis points), Colombia (725 basis points), Costa Rica (675 basis points), Peru (575 basis points), Uruguay (525 basis points), Mexico (350 basis points), Nicaragua (150 basis points), and Guatemala (50 basis points).
“In the domestic environment, the Dominican economy maintains a high dynamism, registering a year-on-year growth of 5.8% during the month of June of this year, which has allowed the accumulated expansion during the first half of 2022 to stand at 5.6%, above its potential. The positive evolution of economic activity has contributed to a significant improvement in the labor market”, he highlighted.
He reiterated that, “despite the complex international scenario, forecast models point to economic growth for the end of 2022 of around 5.0%, one of the highest expansions among emerging economies and the region, in line with what pointed out by international organizations, such as the IMF and the World Bank”.
He underscored that “the positive evolution of foreign exchange-generating activities has favored the relative stability of the exchange rate, reflected in an appreciation of the local currency of approximately 5.0% at the end of July, which helps offset the impact of the imported component on prices and, therefore, to the gradual convergence of inflation to the goal”.
Likewise, he indicated that international reserves have been strengthened to around 14.2 billion dollars, equivalent to about 13.0% of GDP and about six months of imports, exceeding the metrics recommended by the IMF.
“It is important to highlight that the Dominican economy is in a good position to mitigate this adverse shock, taking into account the strength of the macroeconomic fundamentals, the resilience of the productive sectors and the high levels of international reserves,” he said.
