The positive evolution of economic activity during the current year has been driven by the recovery of tourism, as well as by the dynamism of construction, trade, transport and free zones.
SANTO DOMINGO.– The Central Bank of the Dominican Republic (BCRD), at its monetary policy meeting in May 2022, decided to increase its monetary policy interest rate by 100 basis points, from 5.50% per annum to 6.50% per annum.
This decision is based on a comprehensive assessment of recent global economic performance and its impact on inflation, influenced by recent geopolitical conflicts and the global cost shock. In this context, price dynamics have been affected by more persistent external factors than anticipated, including the significant increase in oil prices and other raw materials important for domestic production, as well as high international container shipping costs and other supply chain disruptions. In addition to these external factors, adjustments in domestic private and public utility rates have been contributing to the upward trend in inflation over the past few months.
Specifically, the monthly change in the Consumer Price Index (CPI) in April 2022 was 0.96%, while year-on-year inflation, that is, inflation over the last 12 months, stood at 9.64%. On the other hand, core inflation, which excludes the most volatile components of the consumer basket, was 7.25% in April, reflecting second-round effects on production associated with external supply shocks.
To counteract exogenous factors affecting prices, the Central Bank has been implementing a monetary normalization plan since the end of last year through interest rate increases and liquidity control measures, with the aim of facilitating the convergence of inflation to the target range. In this regard, with the decision in May, the Central Bank of the Dominican Republic (BCRD) has gradually and prudently increased its monetary policy rate five times since November 2021, bringing it to its current level of 6.50% per annum, in line with the international cycle of interest rate hikes.
Additionally, the Central Bank of the Dominican Republic (BCRD) has reduced the financial system's liquidity surplus by approximately RD$80 billion this year through open market operations and the gradual return of funds provided during the pandemic. These measures have accelerated the transmission of monetary policy, contributing to adjustments in domestic interest rates and a significant moderation in the growth of monetary aggregates.
This monetary normalization process aims to prevent the risk of an overheated economy that could exacerbate exogenous inflationary pressures, as well as a widening of the interest rate differential with respect to external rates that could cause volatility in capital flows. In this active monetary policy environment, the Central Bank of the Dominican Republic (BCRD) will continuously monitor international financial conditions and the expectations of economic agents, in order to take the necessary measures for a gradual convergence of inflation to the target range of 4% ± 1% over the monetary policy horizon.
In the international arena, uncertainty remains high due to the conflict between Russia and Ukraine, which has led to a deterioration in the global economic outlook. Consequently, forecasts for global growth continue to be revised downward
up to 3.1% in 2022 according to Consensus Forecasts, while international inflation projections continue to rise.
In the United States, our main trading partner, growth moderated to 3.5% year-on-year in the first quarter of 2022, equivalent to an annualized quarter-on-quarter contraction of 1.5%. Meanwhile, year-on-year inflation in the US reached 8.3% in April, more than four times the 2.0% target for average inflation. Against this backdrop, the Federal Reserve (Fed) has raised the federal funds rate by 75 basis points this year, bringing it to a range of 0.75% to 1.00% annually. For the remainder of 2022, financial market analysts expect further increases in the benchmark rate of approximately 200 basis points. Similarly, other advanced economies such as the United Kingdom and Canada have raised their policy rates by 90 and 75 basis points, respectively.
As for the Eurozone, growth forecasts have also been revised downwards, with Consensus now expecting an expansion of 2.7% in 2022; meanwhile, year-on-year inflation reached 8.1% in May, the highest in the history of this bloc of countries. While the European Central Bank's (ECB) monetary policy rate remains at 0%, the most recent statements by ECB President Christine Lagarde indicate that the institution is prepared to raise the benchmark rate starting in July of this year, while also announcing the end of the monetary expansion program implemented during the pandemic.
In Latin America, almost all central banks in the region have continued to increase their benchmark interest rates since 2021 to counteract high inflationary pressures, as is the case in Argentina (1,100 basis points), Brazil (1,075 basis points), Chile (775 basis points), Paraguay (650 basis points), Peru (475 basis points), Uruguay (475 basis points), Colombia (425 basis points), Costa Rica (325 basis points), Mexico (275 basis points), Nicaragua (100 basis points) and Guatemala (25 basis points).
Regarding commodities, the price of West Texas Intermediate (WTI) crude oil has seen significant increases in recent months, rising from an average of US$83 per barrel in January 2022 to an average of US$110 per barrel in May, closing the month at around US$118 per barrel. Similarly, international prices for primary food commodities, such as corn, wheat, sorghum, and soybeans, as well as fertilizers, remain high due to the armed conflict.
Domestically, the Dominican economy has maintained its strong performance this year, registering a cumulative growth of 5.8% in the Monthly Index of Economic Activity (IMAE) during the first four months of 2022, following a year-on-year expansion of 4.7% in April. This positive economic performance this year has been driven by the recovery of tourism, as well as the dynamism of the construction, commerce, transportation, and free trade zones sectors.
Looking ahead, the Dominican Republic's economic growth outlook has become more conservative due to the high level of uncertainty prevailing in the international environment. In this regard, economic growth is projected to be around 5.0% for this year, close to its potential and higher than the 2.1% growth forecast for Latin America.
On the other hand, credit to the private sector in local currency continues its momentum, expanding by nearly 12% year-on-year in May. Regarding fiscal policy, higher-than-expected tax revenues have provided the necessary leeway to implement measures aimed at mitigating the impact of higher prices
international commodity prices impact on national production and households, especially the most vulnerable.
In the external sector, exports and tourism continue to show dynamism, as do remittances, which reached approximately US$3.2 billion during the first four months of the year. Updated projections point to a current account deficit of between 3.0% and 3.5% of GDP for this year, which would be more than adequately covered by the foreign direct investment expected by the end of 2022, exceeding US$3.4 billion. In this regard, the favorable performance of foreign exchange-generating activities would partially offset the impact of higher oil prices and other imported raw materials.
Furthermore, international reserves remain at historically high levels, around US$14.25 billion, equivalent to 13.3% of GDP and approximately six months of imports, exceeding the metrics recommended by the IMF. These factors have contributed to the relative stability of the exchange rate, reflected in a cumulative appreciation of the local currency of approximately 4.0% as of the end of May, which would help to offset imported inflationary pressures.
It is important to highlight that the Dominican economy is well-positioned to mitigate this adverse shock, given the strength of its macroeconomic fundamentals, the robust performance of domestic demand, and high levels of international reserves. The Central Bank of the Dominican Republic 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 could jeopardize price stability.
