SANTO DOMINGO.-The Central Bank of the Dominican Republic (BCRD), in its monetary policy meeting of June 2023, decided to reduce its monetary policy interest rate (TPM) by 25 basis points, from 8.00% to 7.75% annually.
Additionally, the rate of the permanent liquidity expansion facility (1-day Repos) is reduced from 8.50% to 8.25% per annum; while the rate of remunerated deposits (Overnight) is reduced from 7.50% to 6.75% per annum.
These decisions will help reduce financing costs for financial institutions and will result in lower interest rates in the financial system.
The measures adopted take into account the reduction of domestic inflation, which is within its target range of 4.0% ± 1.0%, as a result of the monetary and fiscal policies implemented, the lower pressures of domestic demand and the decrease in international commodity prices.
Indeed, the monthly change in the Consumer Price Index (CPI) was -0.20% in May, contributing to a 521 basis point drop in year-on-year inflation, from a peak of 9.64% in April 2022 to 4.43% in May 2023. Furthermore, forecast models indicate that year-on-year inflation will maintain its downward trend, settling around the midpoint of the target range of 4.0% by the end of June. Similarly, core inflation, which excludes the prices of the most volatile components of the consumer basket, has decreased from 7.29% in May 2022 to 5.51% in May 2023.
As a result of inflation converging to the target range ahead of schedule, the Central Bank of the Dominican Republic (BCRD) has begun to normalize its monetary policy stance. Accordingly, the cumulative reductions of 75 basis points in the Monetary Policy Rate (50 basis points in May and 25 basis points in June) have been complemented by additional liquidity provision measures, aimed at facilitating financing for productive sectors and households under favorable conditions. This set of measures is helping to accelerate the monetary policy transmission mechanism and should facilitate growth in the second half of the year, in a context where inflation is expected to remain within the target range over the monetary policy horizon.
Additionally, this decision took into account recent global economic trends and outlook. In particular, economic activity in the United States has been more resilient than anticipated, with first-quarter growth revised upward to 1.8% year-over-year and a labor market at full employment. Nevertheless, year-end growth is projected to be 1.3%, lower than the 2.1% forecast for 2022.
On the other hand, inflation in that country has continued to slow down to 4.0% in May 2023, although it remains above its target of 2.0%.
Given this scenario, the Federal Reserve has made cumulative increases of 500 basis points in its benchmark interest rate and, despite pausing at its last meeting, has indicated that it expects additional increases in the second half of the year.
In the Eurozone, growth is projected at just 0.6% for 2023, impacted by the war between Russia and Ukraine, which has led to recessionary conditions in this bloc of countries. Meanwhile, year-on-year inflation in the Eurozone moderated to 6.1% in May, although it remains high relative to the 2.0% target. In this context, the European Central Bank has raised its Monetary Policy Rate (MPR) by 400 basis points since July 2022, and further increases are expected to ensure inflation returns to the target.
In Latin America, inflation has declined in recent months, with the Dominican Republic, Brazil, and Costa Rica standing out as the only countries in the region to have achieved their target inflation range this year. In this context, most Latin American central banks have paused increases in their benchmark interest rates, with the exception of the Dominican Republic, Costa Rica, and Uruguay, which have recently lowered them.
Domestically, the Monthly Indicator of Economic Activity (IMAE) grew by 2.4% year-on-year in May, registering a slight improvement compared to the first four months of the year. Thus, in the January-May 2023 period, the economy expanded by an average of 1.4% year-on-year, as a result of a moderation in domestic demand and a deteriorating international environment amid greater uncertainty. It is important to highlight the positive performance of services activities, primarily the hotels, bars, and restaurants sector, which has mitigated the slowdown in other sectors, such as construction and manufacturing. For the remainder of the year, greater dynamism in economic activity is expected, supported by the implementation of monetary stimulus measures, increased public investment, and a boost from tourism.
In this context, since June, monetary conditions have reflected the acceleration of the monetary policy transmission mechanism, with a reduction in interest rates at commercial banks, especially the lending rate, which has decreased by approximately 400 basis points this month. At the same time, the private loan portfolio in local currency has increased by approximately RD$60 billion in net terms during June and is expanding by more than 16% year-on-year, driven by the rebound in loans to productive sectors.
On the other hand, the strong performance of foreign exchange-generating activities has contributed to the stability of the Dominican peso, which has registered a cumulative appreciation of approximately 1.7% as of the end of June 2023. This performance of the external sector has facilitated the strengthening of international reserves, which stand at around US$16.2 billion, equivalent to 13.2% of GDP and six months of imports, above the metrics recommended by the International Monetary Fund (IMF).
It is important to highlight that the Dominican Republic is well-positioned to continue facing the challenging international landscape, given the strength of its macroeconomic fundamentals and the resilience of its productive sectors. The Central Bank of the Dominican Republic reaffirms its commitment to conducting monetary policy to achieve its inflation target and preserve macroeconomic stability.
