SANTO DOMINGO –The Central Bank of the Dominican Republic (BCRD), at its December 2022 monetary policy meeting, decided to maintain its monetary policy interest rate (MPR) unchanged at 8.50% per annum. Likewise, the rate for the permanent liquidity expansion facility (1-day repos) remains at 9.00% per annum, and the rate for remunerated deposits (overnight deposits) continues at 8.00% per annum.
This decision is based on a thorough evaluation of recent economic performance, particularly inflation.
Commodity prices, particularly oil, have moderated during the second half of the year, while global container shipping costs have decreased. Domestically, inflationary dynamics in recent months have responded to the monetary tightening program and the measures implemented by the government through fuel and energy subsidies and support for agricultural production.
In this context, the monthly variation of the Consumer Price Index (CPI) was 0.47% in November, lower than the monthly average of the last 12 months. Thus, year-on-year inflation has decreased by approximately 206 basis points, from a peak of 9.64% in April to 7.58% in November. Likewise, core inflation, which excludes the most volatile components of the consumer basket such as fuel, electricity, and some food items, has fallen from 7.29% in May to 6.59% in November. It is important to note that core inflation is one of the main indicators considered by central banks for decision-making, as its behavior is more closely linked to prevailing monetary conditions. Therefore, the results obtained reflect the effectiveness of the economic policies adopted to counteract inflationary pressures.
In this regard, the Central Bank of the Dominican Republic (BCRD) has increased its monetary policy rate by 550 basis points since November of last year. This timely response has contributed to the real interbank interest rate—that is, the difference between the nominal interbank rate and inflation expectations—being more than four percentage points above its estimated neutral level. This restrictive monetary policy stance is helping to mitigate domestic demand pressures, consistent with core inflation that is below the overall price increase.
In addition, monetary aggregates have slowed significantly, and an increase in interest rates at commercial banks, primarily in the deposit rate, has been observed as a result of a more than complete transfer of monetary policy decisions. This has maintained a favorable differential with respect to the interest rates of our main trading partners, contributing to greater capital inflows and foreign investment, as well as incentivizing savings in the national currency.
Under current projections, the monetary policy rate is expected to be at an appropriate level for year-on-year inflation to converge to the target range of 4% ± 1% before the end of the first half of 2023, provided the monetary policy transmission mechanism continues to operate. Accordingly, the Central Bank will continue to monitor developments in external and domestic economic conditions and take any necessary measures to preserve macroeconomic stability.
Indeed, geopolitical tensions have led to a deterioration in global economic projections. In this regard, Consensus Forecasts anticipates that global economic growth will slow from 2.8% this year to 1.5% in 2023, while global inflationary pressures are expected to continue easing as commodity prices are projected to be lower next year.
In the United States, growth is projected at 1.9% in 2022 and a slight expansion of 0.2% in 2023. Meanwhile, year-on-year inflation has slowed, falling from 9.1% in June to 7.1% in November, although it remains well above the 2.0% target. Against this backdrop, the Federal Reserve (Fed) began moderating the magnitude of its benchmark interest rate hikes, accumulating an increase of 425 basis points in 2022. For next year, the Fed is expected to implement more gradual interest rate increases as it approaches the end of its tightening monetary cycle, given the forecasts of lower inflation and weaker economic activity.
As for the eurozone (EZ), economic conditions continue to be affected by the armed conflict between Russia and Ukraine; growth is projected at 3.2% for 2022 and a contraction of -0.1% for 2023. On the other hand, year-on-year inflation stood at 10.1% in November, so the European Central Bank raised its benchmark interest rate by 50 basis points at its last meeting, bringing the total increase to 250 basis points this year, and announced further increases for 2023.
In Latin America, almost all central banks have increased their monetary policy rates, placing them significantly above pre-pandemic levels, as is the case in Argentina (75.00%), Brazil (13.75%), Colombia (12.00%), Chile (11.25%), Uruguay (11.25%), Mexico (10.50%), Costa Rica (9.00%), Paraguay (8.50%), the Dominican Republic (8.50%), Peru (7.50%), Nicaragua (7.00%), and Guatemala (3.75%). As a result, regional inflation has begun to ease in recent months, and most central banks are now moderating or pausing their interest rate hike cycles.
Domestically, economic activity expanded by 5.0% year-on-year during January-November 2022, following a more moderate growth rate in recent months. Although international conditions have deteriorated, the Dominican economy is projected to grow by around 5.0% by the end of 2022, close to its potential; while in 2023 it is expected to expand by approximately 4.5%, maintaining its position as one of the fastest-growing economies in the region. Reflecting the dynamism of domestic demand, private credit in local currency expanded by over 14% year-on-year in December; while the financial system maintains high levels of solvency and profitability, with low delinquency rates.
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 commodity prices, as well as to boost public investment in the coming months, as announced by the Government.
On the other hand, foreign exchange generating activities (tourism, exports, remittances, and foreign direct investment) have maintained a positive performance, contributing to an appreciation of the Dominican peso of approximately 2% in 2022. This behavior of the external sector has facilitated the strengthening of international reserves, which stand at around US$14.3 billion in December, equivalent to more than 12.5% of the gross domestic product (GDP) and almost six months of imports, exceeding the metrics recommended by the International Monetary Fund.
The Dominican Republic is well-positioned to continue facing the challenging international landscape, he affirms. The strength of its macroeconomic fundamentals, the resilience of its productive sectors, and sound policies have contributed to the positive assessment of the Dominican economy by international organizations, as noted recently by Standard & Poor’s when it raised the country’s credit rating from 'BB-' to 'BB'.
