SANTO DOMINGO- The Central Bank of the Dominican Republic (BCRD) reported yesterday, Wednesday, May 31, that at its monthly monetary policy meeting it decided to reduce its monetary policy interest rate (TPM) by 50 basis points, from 8.50% to 8.00% annually.
According to the regulatory body's statement, the rate for the permanent liquidity expansion facility (1-day Repos) decreases to 8.50% per year and the rate for remunerated deposits (Overnight) to 7.50% per year.
The Central Bank explains that the decision to lower the benchmark interest rate takes into account the progress in reducing domestic inflation as a result of the monetary tightening program initiated in November 2021 and the implementation of subsidies by the government.
In that regard, he added that lower domestic demand pressures, as well as the moderation of international commodity prices and container transport costs, have contributed to this.
Indeed, the monthly variation of the consumer price index (CPI) was 0.24% in April; contributing to a drop in inflation of 449 basis points, going from a peak of 9.64% in April 2022 to 5.15% in April 2023.
"It is important to highlight that, for the month of May, forecast models indicate that year-on-year inflation would decrease to around 4.5%, returning to its target range of 4% ± 1%," the Central Bank of the Dominican Republic (BCRD) stated in the press release.
Similarly, he specified that core inflation, which excludes the prices of the most volatile components of the basket, maintains a downward trend, going from 7.29% in May 2022 to 5.83% in April 2023.
He noted that, as a result of inflation converging to its target range ahead of schedule, the Central Bank of the Dominican Republic (BCRD) decided to begin normalizing its monetary policy stance.
The institution explained that the reduction in the Monetary Policy Rate (MPR) will be complemented by additional liquidity provision measures and proposals to the Monetary Board to facilitate financing for productive sectors and households under favorable conditions.
The Central Bank of the Dominican Republic (BCRD) explained in the document that this set of measures would help accelerate the transmission mechanism of monetary policy and contribute to a gradual recovery of growth to around its potential within the monetary policy horizon.
"It should be noted that, according to the BCRD's forecasting system, inflation would remain within the target range in the medium term under this active monetary policy scenario," he added.
In addition, the Central Bank indicated that the reduction of the Monetary Policy Rate (MPR) preserves a favorable interest rate differential with respect to the United States of America (USA), supporting capital flows and foreign investment to our country.
Perspectives
On the other hand, this decision takes into account the global economic outlook. In that regard, projections indicate that global growth will slow from 3.0% in 2022 to 2.1% this year, according to Consensus Forecasts.
Specifically, the Central Bank added that for the US, growth is expected to moderate from 2.1% in 2022 to 1.1% by the end of this year.
The country's year-on-year inflation rate has continued to slow to 4.9% in April 2023, although it remains above its target of 2.0%.
"Given this scenario and considering the strength of the U.S. labor market, there is uncertainty about the Federal Reserve's next decision on whether to raise its interest rate further or pause after accumulating increases of 500 basis points since the beginning of 2022," he said.
Eurozone
The Eurozone is projected to grow by just 0.7% during 2023, affected by the war between Russia and Ukraine, which has caused recessionary conditions in Germany, the bloc's largest economy.
Meanwhile, year-on-year inflation in the Eurozone moderated to 7.0% in April, although it remains high relative to the 2.0% target. The European Central Bank has raised its policy interest rate by 375 basis points since July 2022, and further increases are expected to ensure inflation returns to the target.
