The 50 point interest rate increase of the Federal Reserve of the United States, announced on Wednesday, will tighten the conditions of bank credit in the Dominican Republic.
However, the growth that the Dominican economy has been registering and the fact that the central bank had anticipated the turn that the Federal Reserve monetary policymake the country better able to face the impact of interest rate hikes in the United States.
From November 2021 to date, the Central Bank has ordered four increases in the reference interest rate, which have taken it from 3.00 percent to 5.50 percentwhile the Reserve has only made two increases, one of 25 points, which it had ordered in March, for the first time since 2018, and last Wednesday, of 50 points, to place itself in a range of between 0.75% and 1%.
The Central Bank has just reported that the Dominican economy had a year-on-year expansion of 6.1% during the first quarter of 2022, which, in its opinion, is in line with the projections recently released by the International Monetary Fund (IMF), where it is expected a growth of 5.5% for the country at the end of the year.
Obviously, everything will depend on what happens with the inflation rate both in the United States and in the Dominican Republic.
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The year-on-year rate of inflation in the United States skyrocketed in March to 8.5%, its highest level in more than 40 years, while the Dominican Republic’s annualized inflation rate at the same period was 7.5 percent.
The markets have assumed, according to the behavior of the wall street stock marketthat another increase of the magnitude of the one announced in March, of 50 points, would not be necessary, although the possibility of smaller increases being announced is foreseen.
If this were the case, the risk of the impact of the monetary correction in the United States would be lower for the Dominican economy because there would be less pressure on local monetary policy, although it is taken for granted that further increases in rates would be necessary to the extent that that the Federal Reserve order other increases, to prevent the gap between domestic rates and that of the United States is significantly reduced and thus avoid capital outflows.
Another important element to note is that higher interest rates also take away flexibility from public finances because it would increase the debt service burden.
