SANTO DOMINGO.-The Central Bank of the Dominican Republic (BCRD), at its December 2023 meeting, decided to maintain its monetary policy interest rate (MPR) at 7.00% per year.
The rate of the permanent liquidity expansion facility (1-day repos) remains at 7.50% per annum and the rate of remunerated deposits (Overnight) continues at 5.50% per annum.
This measure takes into account the recent evolution of the international environment and the behavior of the Dominican economy, especially inflation.
Therefore, year-on-year inflation has decreased during the year and is in the middle of 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.
Indeed, year-on-year inflation has decreased by 564 basis points from a peak of 9.64% in April 2022 to 4.00% in November 2023, and is projected to close 2023 below 4.00%, the central value of the target range.
Similarly, core inflation, which excludes the prices of the most volatile components of the basket such as fuels and some foods, maintains the downward trend, decreasing from 7.29% in May 2022 to 4.48% in November 2023.
In this context of low inflationary pressures, the Central Bank has reduced its Monetary Policy Rate (MPR) by 150 basis points cumulatively since its meeting in May.
These measures have been complemented by a liquidity provision program, which has allowed the channeling of more than RD$170 billion through financial intermediaries, to facilitate loans to productive sectors and households at interest rates of up to 9% per year.
These measures have helped to accelerate the transmission mechanism of monetary policy, boosting credit and facilitating economic recovery.
Looking ahead, forecast models indicate that headline and core inflation will remain within the target range of 4.0% ± 1.0% in 2024, under an active monetary policy scenario.
The Central Bank will continue to monitor the macroeconomic context, especially the anticipated easing of international financial conditions, which would provide greater scope for further normalization of its monetary policy stance.
In the United States, economic activity has been more resilient than anticipated, while inflation continues to decline, falling from a peak of 9.1% in June 2022 to 3.1% in November 2023, although it remains above the 2.0% target. Given this scenario, the Federal Reserve (Fed) kept the federal funds rate unchanged in December 2023 and projects further reductions throughout 2024.
In the eurozone, the war between Russia and Ukraine has contributed to recessionary conditions in some of its major economies. Meanwhile, year-on-year inflation in the eurozone moderated to 2.4% in November, still above its 2.0% target. Against this backdrop, the European Central Bank (ECB) kept its benchmark interest rate unchanged in December 2023 and is expected to begin a cycle of rate cuts next year.
In Latin America, inflation has maintained its downward trend, returning to the target range in most countries of the region. As a result, almost all central banks have reduced their monetary policy interest rates in recent months, including Costa Rica (cumulative reduction of 300 basis points), Chile (300), Uruguay (225), Brazil (200), Paraguay (175), the Dominican Republic (150), Peru (100), and Colombia (25).
Regarding commodities, the price of West Texas Intermediate (WTI) crude oil has increased in recent weeks, reaching nearly US$75 per barrel, amid heightened geopolitical tensions in the Middle East. Similarly, freight costs have risen recently due to geopolitical conflicts and weather events affecting key global trade routes.
At the national level, the Dominican economy continues its recovery process, with a year-on-year expansion of 4.2% in November, higher than the year-on-year growth of 3.6% in October and 3.1% in September, as well as the 2.6% of the third quarter of 2023. The result for November reflected the dynamism of the hotel, bar and restaurant sector, as well as the improved performance of the construction, manufacturing, financial services and trade sectors.
Looking ahead, monetary stimulus and increased public investment are expected to continue boosting economic activity towards its potential growth of 5% in 2024, which would be one of the highest expansions in Latin America according to international organizations such as the International Monetary Fund (IMF) and Consensus Forecast.
Financial conditions have been responding favorably since the implementation of monetary policies, with lower interest rates and an acceleration in the growth of monetary aggregates, which are expanding at rates significantly higher than that of nominal gross domestic product (GDP). In this context of greater liquidity, private credit in local currency is growing at around 20% year-on-year, driven by the expansion of loans to productive sectors, such as construction and commerce, as well as 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. Additionally, international reserves are at high levels, exceeding US$15.3 billion, equivalent to 12.8% of GDP and nearly six months of imports, above the metrics recommended by the IMF.
It is important to highlight that the Dominican economy is well-positioned to continue facing the challenging outlook, given the strength of its macroeconomic fundamentals and the resilience of its productive sectors. The Central Bank of the Dominican Republic will continue to monitor macroeconomic developments, both external and domestic, with the aim of promptly adopting the necessary measures to preserve macroeconomic stability and help keep inflation within the target range.
