SANTO DOMINGO.-The Central Bank of the Dominican Republic (BCRD), in its monetary policy meeting of February 2024, decided to maintain its monetary policy interest rate (TPM) at 7.00% per annum.
The rate for the permanent liquidity expansion facility (1-day repos) remains at 7.50% per annum, while the rate for remunerated deposits (overnight) continues at 5.50% per annum.
This measure took into consideration the recent evolution of the international environment, particularly the expectations that external interest rates would remain high for longer than anticipated and the increase in commodity prices and the cost of transporting goods due to geopolitical conflicts and climatic factors.
In addition, the recovery that the national economy has been registering and the acceleration of private credit were considered, in a context in which inflation is within the target range of 4.0% ± 1.0%.
Indeed, year-on-year inflation has decreased, reaching 3.32% in January 2024, below the midpoint of the target range, as a result of the monetary and fiscal policies implemented. Core inflation, which excludes the prices of the most volatile components of the consumer basket, such as fuels and some food items, continues its downward trend, reaching 4.09% in January 2024.
The BCRD's forecasting models indicate that both headline and core inflation will remain within the target range of 4.0% ± 1.0% during the current year, under an active monetary policy scenario.
In this context of low inflationary pressures, the Central Bank of the Dominican Republic (BCRD) has reduced its Monetary Policy Rate (MPR) by 150 basis points since May 2023. These measures have been complemented by a liquidity provision program through financial intermediaries, which have channeled loans of approximately RD$194 billion to productive sectors, micro, small and medium-sized enterprises (MSMEs) and households; at interest rates of up to 9% per year.
The monetary stimulus plan has managed to accelerate the transmission mechanism of monetary policy; boosting private credit in national currency to expand by around 21% year-on-year and contributing to economic recovery from the second half of 2023.
In the United States, economic activity has been more resilient than anticipated, with growth of 2.5% in 2023 and a labor market that remains at full employment. Meanwhile, inflation has slowed to 3.1% in January 2024, although it remains above the 2.0% target. Given this scenario, international analysts expect the Federal Reserve to postpone the start of interest rate cuts until the middle of this year.
In the Eurozone, economic activity remains weak, affected by the war between Russia and Ukraine, which has contributed to recessionary conditions in some of the bloc's major economies. Meanwhile, year-on-year inflation moderated to 2.8% in January, although it remains above its 2.0% target. Against this backdrop, the European Central Bank (ECB) is also expected to begin its rate-cutting cycle by mid-2024.
In Latin America, inflation has maintained its downward trend, returning to the target range in most countries of the region with inflation-targeting frameworks. As a result, almost all central banks have reduced their monetary policy interest rates in recent months, including Chile (cumulative reduction of 400 basis points), Costa Rica (325), Uruguay (250), Brazil (250), Paraguay (225), the Dominican Republic (150), Peru (150), and Colombia (50).
Regarding raw materials, the price of West Texas Intermediate (WTI) crude oil has increased since the beginning of this year, reaching around US$79 per barrel in February, amid lower production and geopolitical tensions. Similarly, freight costs have recently risen due to geopolitical conflicts in the Middle East and weather-related factors affecting key global trade routes.
At the national level, the Dominican economy continues its recovery process, with the Monthly Index of Economic Activity (IMAE) expanding by 4.6% year-on-year in January. This result reflected the dynamism of the hotel, bar, and restaurant sector, as well as the strong performance of the construction, financial services, and commerce sectors.
Looking ahead, the monetary policy transmission mechanism is expected to continue operating and, together with a faster pace of public investment execution, to continue contributing to boosting economic activity towards its potential growth of 5% in 2024.
In this way, the Dominican economy would achieve one of the highest expansions in the region during the current year, according to international organizations such as the International Monetary Fund (IMF), the World Bank and Consensus Forecast.
On the other hand, foreign exchange generating activities continue to show favorable performance; tourism, exports from free zones, remittances and foreign direct investment stand out.
In that context, the relative stability of the exchange rate has been maintained and international reserves remain at high levels, equivalent to approximately 12% of gross domestic product (GDP) and about five months of imports, significantly above the metrics recommended by the IMF.
It is worth noting that the Dominican economy is well positioned to face the challenging outlook, taking into account the strength of its macroeconomic fundamentals, the resilience of its productive sectors, and the improvement in country risk indicators in international markets.
The top financial authority will continue to monitor macroeconomic developments, with the aim of continuing to adopt timely measures that preserve macroeconomic stability and contribute to keeping inflation within the target range.
