Despite the complex international outlook, the Central Bank states that forecasting models point to economic growth of around 5.0% by the end of 2022, one of the highest expansions among emerging economies and in the region, practically double what is expected for Latin America according to Consensus Forecasts, and in line with what is indicated by international organizations, such as the IMF and the World Bank.
SANTO DOMINGO – The Central Bank of the Dominican Republic (BCRD) increased its monetary policy interest rate by 25 basis points, from 7.75% to 8.00% annually. As a result, the rate for the permanent liquidity expansion facility (1-day repos) now stands at 8.50% annually, and the rate for remunerated deposits (overnight deposits) at 7.50% annually.
According to the agency, this decision is based on a comprehensive assessment of recent global economic performance and its impact on inflation, taking into account geopolitical conflicts and the global cost shock. It explains that price dynamics continue to be affected by more persistent external factors than anticipated, associated with the extraordinary increase in oil and other commodity prices, as well as high international container shipping costs and other supply chain disruptions.
In addition, he argues, domestic inflation has been influenced by the second-round effects of these external components and by domestic demand pressures, as the economy has recovered remarkably from pre-pandemic levels.
The Central Bank of the Dominican Republic (BCRD) explains that, specifically, the monthly variation of the Consumer Price Index (CPI) was 0.50% in July 2022, while year-on-year inflation, that is, inflation over the last 12 months, stood at 9.43%, moderating from its highest level of 9.64% reached in April 2022, with a further slowdown projected for the coming months. Similarly, year-on-year core inflation, which excludes the most volatile components of the consumer basket, is beginning to show signs of moderation, falling from 7.29% in May to 7.10% in July.
Faced with high inflationary pressures, the Central Bank of the Dominican Republic (BCRD) announced that it initiated a monetary tightening process at the end of 2021 through increases in its monetary policy rate and a reduction in excess liquidity in the financial system. The objective was to prevent the risk of overheating the economy and a widening of the differential with respect to external interest rates. Following these measures, a significant increase in the deposit interest rate has been recorded, while the increase in the lending interest rate has been more gradual, remaining below pre-pandemic levels.
It also notes that a significant moderation in the growth of monetary aggregates has been observed.
It notes that the recent measures implemented by the central bank have reversed the expansionary monetary stance adopted during the pandemic, which will continue to contribute to the gradual convergence of inflation to the target range of 4% ± 1% over the monetary policy horizon.
In this active monetary policy scenario, the Central Bank of the Dominican Republic (BCRD) will be constantly monitoring external financial conditions and the expectations of economic agents, in order to take the necessary measures to maintain price stability.
In the international environment, the report details that high levels of uncertainty persist, primarily due to the armed conflict between Russia and Ukraine, leading to a deterioration in global economic projections. In this regard, forecasts for global growth continue to be revised downward to 2.6% in 2022, according to Consensus Forecasts, while the outlook for international inflation remains high.
The Central Bank of the Dominican Republic (BCRD) statement also explains that in the United States, the Dominican Republic's main trading partner, growth slowed to 1.7% year-on-year in the second quarter of 2022, equivalent to an annualized quarter-on-quarter contraction of -0.6%. In this context, Consensus Forecasts lowered its growth outlook for the US economy to 1.7% for this year.
Year-on-year inflation in the United States is more than four times the Federal Reserve's official target of 2.0%, although it is beginning to moderate, falling from 9.1% in June to 8.5% in July. Against this backdrop, the Federal Reserve has raised its benchmark interest rate by 225 basis points this year, and following Fed Chairman Jerome Powell's remarks at Jackson Hole, most market analysts expect the rate to be increased by 75 basis points at the September meeting, marking the third consecutive increase.
Regarding the Eurozone, the institution also details that economic forecasts are being affected by the armed conflict between Russia and Ukraine, projecting an expansion of Gross Domestic Product (GDP) of 2.8% in 2022; while year-on-year inflation continues to increase, reaching 8.9% in July, the highest in the history of this bloc of countries.
In this context, the European Central Bank, at its July meeting, increased its monetary policy rate by 50 basis points and announced that it considers further increases appropriate in the coming months. It is worth noting that the United Kingdom, which is not part of the Eurozone, has an annual inflation rate of 10.1% and has increased its benchmark interest rate by 165 basis points during 2022.
It details that in Latin America, almost all central banks in the region have accumulated significant increases in their reference rates since 2021 to deal with high levels of inflation, as is the case in Argentina (3,150 basis points), Brazil (1,175 basis points), Chile (925 basis points), Paraguay (750 basis points), Colombia (725 basis points), Costa Rica (675 basis points), Peru (625 basis points), Uruguay (575 basis points), Mexico (425 basis points), Nicaragua (200 basis points) and Guatemala (50 basis points).
Regarding raw materials, the price of a barrel of West Texas Intermediate (WTI) crude oil has shown a downward trend in recent months, going from an average of US$115 per barrel during June 2022 to about US$94 per barrel during August.
Meanwhile, international prices for primary food commodities, such as corn, wheat, sorghum, and soybeans, have decreased due to moderating global demand and improvements on the production side, although they remain above pre-pandemic levels.
Domestically, the Dominican economy has expanded above its potential, growing by a cumulative 5.5% during the first seven months of 2022, following a year-on-year increase of 4.7% in July. This positive economic performance has contributed to a significant improvement in the labor market, reflected in a decrease in the open unemployment rate, which fell from 8.0% in the first quarter of 2021 to 5.2% in April-June 2022.
Despite the complex international outlook, the Central Bank states that forecasting models point to economic growth of around 5.0% by the end of 2022, one of the highest expansions among emerging economies and in the region, practically double what is expected for Latin America according to Consensus Forecasts, and in line with what is indicated by international organizations, such as the IMF and the World Bank.
Reflecting the boost in domestic demand, private credit in local currency is growing above 13% year-on-year at the end of August, driven mainly by financing to households, as well as to the agricultural, construction and trade sectors.
He clarifies that it is important to highlight that this growth is below the expansion of nominal GDP, which is consistent with the monetary policy stance.
Regarding fiscal policy, he explains that the higher-than-estimated tax revenues have provided the necessary space to implement subsidies and other measures aimed at mitigating the impact of higher international commodity prices on national production and households, especially the most vulnerable.
On the other hand, a year-on-year appreciation of the exchange rate of approximately 7.3% has been observed at the end of August, as a result of the dynamism of foreign exchange generating activities (tourism, exports, remittances and foreign direct investment) and the greater capital inflows, based on the good macroeconomic fundamentals of the Dominican Republic.
In this context , the Central Bank has been purchasing foreign currency through the Electronic Foreign Exchange Platform to strengthen its international reserves and prevent a sharp drop in the exchange rate. In this way, the issuing entity has made net purchases of foreign currency exceeding US$1.2 billion over the last three months, which has contributed to international reserves reaching approximately US$14 billion, equivalent to about 13% of GDP and roughly six months of imports, surpassing the metrics recommended by the IMF.
It also specifies that it is important to highlight that the Dominican economy is in a good position to continue facing the adverse shock, taking into account the strength of the macroeconomic fundamentals and the resilience of the productive sectors.
The Central Bank of the Dominican Republic (BCRD) reaffirms its commitment to conducting monetary policy to achieve its inflation target and ensure the proper functioning of the financial and payment systems. Therefore, it will continue to monitor the international situation and inflationary pressures, with the aim of adopting additional measures in response to factors that may jeopardize price stability.
