In a statement, monetary authorities announced they will maintain their policy rate; they highlighted the expansion of loans for construction
The future looks promising, according to forecasts from the Central Bank, which projects that the construction and agricultural sectors will experience improvement in the coming months. This information was released in a statement announcing its decision to maintain its annual monetary policy rate at 7.50 percent
At the national level, the Monthly Indicator of Economic Activity (IMAE) registered an expansion of 2.0% year-on-year in August, accumulating an average growth of 1.5% in the first eight months of 2023.
“It is important to highlight the positive performance of the hotel, bar, and restaurant sector, as well as the improvement in sectors such as construction and agriculture. For the remainder of the year, greater dynamism in economic activity is expected, supported by the implementation of monetary stimulus measures, increased projected public investment, and the sustained boost from tourism,” the document states.
The Central Bank's decision to maintain its monetary policy interest rate (MPR) at 7.50% per annum was adopted at its September monetary policy meeting.
Also, the rate of the permanent liquidity expansion facility (1-day repos) will remain at 8.00% per annum and the rate of remunerated deposits (overnight) will continue at 6.25% per annum.
The measures were taken after a thorough evaluation of the evolution of external and internal uncertainty factors, as well as the recent behavior of the Dominican economy, with emphasis on inflation.
According to the Central Bank, year-on-year inflation has decreased significantly this year and is within the target range of 4.0% ± 1.0%, as a result of the monetary and fiscal policies implemented, as well as lower domestic demand pressures.
In fact, year-on-year inflation has decreased from a peak of 9.64% in April 2022 to 4.27% in August 2023, equivalent to a drop of 537 basis points during this period.
Likewise, core inflation, which excludes the prices of the most volatile components of the basket such as fuels, some foods and other inputs for the manufacture of goods, maintains the downward trend, decreasing from 7.29% in May 2022 to 4.82% in August 2023.
Looking ahead, forecast models indicate that inflation would remain within the target range of 4.0% ± 1.0% for the remainder of 2023 and into 2024, under an active monetary policy scenario.
In this context of low inflationary pressures, the Central Bank has reduced its monetary policy rate by 100 basis points cumulatively since its meeting in May.
These decisions have been complemented by a liquidity provision program through the release of the legal reserve requirement and the Rapid Liquidity Facility, which has allowed the channeling of more than RD$126 billion through financial intermediaries to facilitate loans to productive sectors and households under favorable conditions.
The measures aim to accelerate the transmission mechanism of monetary policy, contributing to the revitalization of credit and economic recovery in the second half of the year.
In the international environment, growth projections for the United States of America (USA) have been revised upwards, with a projected expansion of 2.1% for the year 2023.
On the other hand, inflation in the US has fallen from a peak of 9.1% in June 2022 to 3.7% in August 2023, although it registered a slight uptick last month driven by higher fuel prices. Given this scenario, the Federal Reserve paused its tightening cycle by maintaining its benchmark interest rate at 5.25%–5.50% annually at its September meeting, although it indicated that it could implement an additional increase during the remainder of the year.
In the Eurozone, economic growth is projected at 0.5% in 2023, impacted by the war between Russia and Ukraine, which has led to recessionary conditions in some of the bloc's major economies. Meanwhile, the Eurozone's year-on-year inflation rate moderated to 5.2% in August, although it remains high relative to the 2.0% target. Given this inflationary outlook, the European Central Bank decided to raise its benchmark interest rate by 25 basis points at its September meeting, bringing it to 4.50% annually.
In Latin America, inflation has maintained its trend, returning to the target range in most countries with inflation-targeting frameworks. In this context, most of these central banks have begun reducing their monetary policy interest rates this year, including Costa Rica (250 basis point reduction), Chile (175), Uruguay (150), the Dominican Republic (100), Brazil (100), Paraguay (50), and Peru (25). Additionally, other central banks in the region, such as Colombia and Mexico, are expected to begin their rate-cutting cycles before the end of 2023.
Regarding commodities, the price of West Texas Intermediate (WTI) crude oil rose to over US$90 per barrel at the end of September 2023, amid increased supply constraints. Similarly, September saw rises in international prices for some agricultural commodities affected by geopolitical conflicts and extreme weather events.
Financial projections
Financial conditions have been responding favorably to expansionary monetary measures, as the monetary policy transmission mechanism operates. As a result, reductions of approximately 200 basis points have been recorded in the weighted average lending and deposit rates of commercial banks compared to the end of May.
In turn, as a result of the easing measures, monetary aggregates have experienced greater growth, expanding at rates significantly higher than that of nominal GDP. Specifically, the money supply (M1) registered a year-on-year increase of 14.8% at the end of August; while the broader money supply (M2) and the money supply (M3) grew by 17.5% and 15.4% year-on-year, respectively.
It anticipates an expansion of loans to construction and other sectors
In the context of greater liquidity, the private credit portfolio in national currency continues to grow above 17% year-on-year, driven by the expansion of loans to productive sectors, such as construction and commerce, in addition to financing to households.
On the other hand, the strong performance of foreign exchange-generating activities has contributed to the stability of the Dominican peso this year. In this context, international reserves are at high levels, exceeding US$15.7 billion, equivalent to 13% of GDP and about six months of imports, above the metrics recommended by the IMF.
It is important to highlight that the Dominican economy is in a good position to continue facing the challenging outlook, taking into account the strength of its macroeconomic fundamentals and the resilience of the productive sectors.
The Central Bank of the Dominican Republic assured that it will continue to monitor economic developments and external and internal risk factors, with the aim of continuing to adopt timely measures to preserve macroeconomic stability and help keep inflation within the target range.
Published in El Día.
