Contrary to the conventional effect that was to be expected after increases in interest rates in USAwhich was that the Dominican currency, like that of the other emerging countries, depreciated, the peso registered an accumulated appreciation that some estimate at 8.75 percent in the last two years.
This occurs in a scenario in which the US dollar has reached record highs in the last year, harming different economies in the world that depend on that currency when paying for some imports, since at least half of international trade is paid in American dollars.
Another effect that is traditionally expected with the increase in interest rates in USA is that the debt service of emerging countries increases not only as a result of higher interest rates, but also as a result of a possible depreciation of the currency that would force governments to seek more pesos to cover their debt, generating fiscal pressures , an effect that has been dampened in the Dominican Republic with the appreciation of the peso.
We invite you to read: Most of the basic basket products have dropped in price
The appreciation of the peso has also prevented the subsidies granted by the government to fuel and food from being greater than the levels already reached, and the same from happening with transfers to the electricity sector, since in all these items the exchange rate affects directly.
There is no doubt that by appreciating the peso, instead of depreciating, fiscal pressures have been prevented from overflowing and the inflation rate from reaching the double digits that it has avoided reaching.
This has been achieved because the signs of strength exhibited by the Dominican economy have made it possible to increase the supply of dollars in the local market and strengthen the country’s international reserves, and because good management of monetary policy has led to central bank to opportunely order increases in the interest rate to avoid capital outflows.
Inflationary pressures worldwide, generated by the effects of the pandemic, the crisis in maritime transport and the war in Ukraine, have forced governments to make the fight against inflation the main objective of their economic policy. And in the Dominican Republicthe appreciation of the exchange rate has been the fence that has prevented an overflow of prices.
You can also read: How is the dollar and euro in DR banks?
Devaluations are problematic
Devaluations are problematic because they raise prices, especially for imported goods. This has been particularly worrying at a time when there are supply problems and the war in Ukraine is affecting deliveries. To protect their currencies, the central banks of developing countries tend to raise their own interest rates, which is what the Central Bank has done in a timely manner.
