SANTO DOMINGO.-The Central Bank of the Dominican Republic (BCRD), in its September 2022 policy meeting, decided to increase its monetary policy interest rate (MPR) by 25 basis points, from 8.00% to 8.25% annually.
Thus, the rate of the permanent liquidity expansion facility (1-day Repos) goes from 8.50% to 8.75% per year and the rate of remunerated deposits (Overnight), from 7.50% to 7.75% per year.
“This decision is based on a thorough assessment of recent economic performance, particularly inflationary pressures,” the monetary authority said.
Regarding external factors, there has recently been a moderation in commodity prices, particularly oil and food; as well as in container transport costs, which have gone from a peak of about US$20,000 per container from ports in Asia in 2021 to a global average of approximately US$4,000 per container today.
On the other hand, inflation continues to be influenced by the second-round effects of these external components and by domestic demand pressures, as the momentum of economic activity is maintained.
Low inflation
In that context, the monthly variation of the consumer price index (CPI) stood at 0.21% during August 2022, the lowest in the last 27 months.
Thus, year-on-year inflation continues its gradual convergence to the target range of 4% ± 1%, slowing from a peak of 9.64% in April to 8.80% in August. Likewise, core inflation, which excludes the most volatile components of the basket, is beginning to show signs of moderation, falling from 7.29% in May to 7.12% in August.
The increases made in the TPM, along with the reduction in inflation expectations, have caused the real interbank interest rate to be approximately one percentage point above its estimated neutral level.
Likewise, there is evidence of a significant slowdown in monetary aggregates and a significant increase in the passive interest rate.
The increase in the active interest rate has been more gradual, remaining below pre-pandemic levels.
In this active monetary policy scenario, inflation is expected to continue slowing in the coming months, converging to the target range by mid-2023
Preventive measure
It is noted that this decision to increase the policy rate by 25 basis points takes into account that the Central Bank of the Dominican Republic (BCRD) proactively initiated the monetary tightening process at the end of 2021, whose timely reaction has contributed to moderating inflation and has provided space for more gradual adjustments to the policy rate, unlike what has been observed in most advanced and emerging economies.
In the international environment, 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 have been revised downward to 2.6% in 2022, according to Consensus Forecasts, while the outlook for international inflation remains high.
In the United States, our main trading partner, growth has slowed, with an expansion of 1.7% projected for this year, according to Consensus. Meanwhile, year-on-year inflation is beginning to moderate, falling from 9.1% in June to 8.3% in August, although it is still more than four times the official target of 2.0%. Against this backdrop, the Federal Reserve raised the benchmark interest rate by 75 basis points (bps) in September, bringing the year-to-date increase to 300 bps, while also indicating that further adjustments would be necessary for the remainder of 2022.
Regarding the Eurozone, economic forecasts are being affected by the aforementioned armed conflict, with projected growth of 2.9% in 2022; meanwhile, inflation reached 10.0% in September, the highest in the history of this bloc of countries. In this context, the European Central Bank, at its last meeting, increased its Monetary Policy Rate (MPR) by 75 basis points, accumulating a 125 basis point increase for the year, and has announced further increases in the coming months. Similarly, the Bank of England has increased its MPR by 200 basis points this year, with further adjustments expected due to higher inflation expectations and deteriorating economic outlook.
In Latin America, almost all central banks have significantly increased their monetary policy rates, placing them above pre-pandemic levels, as is the case in Argentina (reference rate at 75.00%), Brazil (13.75%), Chile (10.75%), Uruguay (10.25%), Colombia (10.00%), Mexico (9.25%), Costa Rica (8.50%), Paraguay (8.50%), Dominican Republic (8.25%), Peru (6.75%), Nicaragua (6.00%) and Guatemala (3.00%).
In the domestic environment
The Dominican economy continues to expand above its potential, growing cumulatively by 5.5% during the first eight months of 2022, following a year-on-year variation of 5.4% during the month of August.
Economic growth projections for the end of 2022 have been revised slightly upwards, placing them between 5.0% and 5.5%, one of the highest expansions among the economies of the region.
Reflecting economic dynamism, private credit in national currency is growing above 14% year-on-year at the end of September, similar to the expansion of nominal GDP.
Regarding fiscal policy, the higher-than-estimated tax revenues stand out, providing the necessary space to implement subsidies aimed at mitigating the impact of higher international commodity prices on national production and households, as well as providing assistance to the provinces affected by Hurricane Fiona.
On the other hand, a cumulative appreciation of 7.6% in the exchange rate has been observed at the end of September, 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 that context, the Central Bank has made net purchases of foreign currency of about US$1.5 billion during the last four months with the aim of avoiding an abrupt fall in the exchange rate and maintaining high levels of international reserves.
