SANTO DOMINGO – The Central Bank of the Dominican Republic (BCRD) announced that it has decided to increase its monetary policy interest rate by 75 basis points, from 6.50% to 7.25% annually. As a result, the rate for the permanent liquidity expansion facility (1-day repos) will increase from 7.00% to 7.75% annually, and the rate for remunerated deposits (overnight deposits) will rise from 6.00% to 6.75% annually.
According to records published by the Central Bank, the last time the monetary policy rate was this high was in January 2009, when it was set at 8.50%. This would be the highest rate in the last 13 years.
According to the statement, this decision is based on a "comprehensive assessment" of the recent behavior of the global economy and its impact on inflation, influenced by geopolitical conflicts and the global cost shock, the institution reported.
In that order, the Central Bank of the Dominican Republic (BCRD) indicated that price dynamics continue to be affected by external factors that have been more persistent than expected, associated with the extraordinary increase in oil and other commodity prices, as well as the high costs of international container transport and other disruptions in supply chains.
In addition to these external components, in recent months internal pressures have begun to emerge as aggregate demand has recovered significantly to pre-pandemic levels and tariffs for various services in the economy are adjusted.
In particular, the monthly variation of the consumer price index (CPI) stood at 0.49% during May 2022, while the year-on-year inflation, that is, in the last 12 months, moderated slightly to 9.47%.
On the other hand, core year-on-year inflation, which excludes the most volatile components of the basket, reached 7.29% in May, reflecting second-round effects on production associated with external supply shocks and internal demand pressures.
"To help counteract inflationary pressures, the Central Bank has significantly reduced the excess liquidity in the financial system through open market operations and the gradual return of resources that had been provided during the pandemic. These measures have accelerated the transmission mechanism of monetary policy, contributing to the adjustment in domestic interest rates and a significant moderation in the growth of monetary aggregates," the institution explained in the document delivered to the media.
Liquidity control measures and gradual increases in the monetary policy rate have reversed the expansionary stance implemented during the pandemic, which would facilitate a gradual convergence of inflation to the target range of four percent ± one percent over the monetary policy horizon, he added.
He explained that the monetary normalization process aims to prevent the risk of an overheated economy that could exacerbate inflationary pressures from both external sources and domestic demand, as well as a widening of the interest rate differential with respect to external rates that could cause volatility in capital flows. In this active monetary policy environment, the Central Bank of the Dominican Republic (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.
International environment
In the international environment, the Central Bank of the Dominican Republic (BCRD) indicated that uncertainty remains high due to the armed conflict between Russia and Ukraine, which has led to a deterioration in the global economic outlook. In this regard, global growth forecasts continue to be revised downward to 2.9% in 2022, according to Consensus Forecasts, while international inflation projections continue to rise.
He added that in the United States of America, the Dominican Republic's main trading partner, growth has moderated to 3.5% year-on-year in the first quarter of 2022, equivalent to an annualized quarter-on-quarter contraction of -1.6%.
On the other hand, year-on-year inflation in that country reached 8.6% in May, the highest in four decades and more than four times the target of 2.0% for average inflation.
