SANTO DOMINGO– The Central Bank of the Dominican Republic (BCRD) announced today that, at its July monetary policy meeting, it decided to increase its monetary policy interest rate by 50 basis points, from 7.25% to 7.75% annually. As a result, the rate for the permanent liquidity expansion facility (1-day repos) rose from 7.75% to 8.25% annually, and the rate for remunerated deposits (overnight deposits) increased from 6.75% to 7.25% annually.
This decision marks another increase in the monetary policy rate after the Central Bank decided in June to raise it by 75 basis points, from 6.50 to 7.25% annually.
“This decision is based on a comprehensive assessment of the recent behavior of the global economy and its impact on inflation, influenced by geopolitical conflicts and the global cost shock,” the institution argued yesterday in a press release announcing the recent increase.
“In that order,” he added, “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 the high costs of international container transport and other disruptions in supply chains. In addition, domestic inflation has been influenced by the second-round effects of these external components, as aggregate demand has recovered significantly compared to pre-pandemic levels.”.
At the end of 2021, the Central Bank began a monetary normalization process through increases in its monetary policy rate and a reduction in the excess liquidity of the financial system, with the objective – as explained – of counteracting inflationary pressures, avoiding risks of overheating the economy, as well as a deterioration of the differential with respect to external interest rates.
“Following these measures, there has been a significant increase in the deposit interest rate, while the increase in the lending interest rate has been more gradual, remaining below pre-pandemic levels. Likewise, a significant moderation in the growth of monetary aggregates has been observed,” the bank stated.
In particular, the monthly variation of the consumer price index (CPI) stood at 0.64% during June 2022, while the inflation , that is, in the last 12 months, stood at 9.48%, moderating with respect to its highest level reached in 2022 of 9.64% in April, the Central Bank detailed.
“Similarly, inflation , which excludes the most volatile components of the basket, is beginning to show signs of moderation, going from 7.25% in May to 7.11% in June,” he said.
He added that the recent measures implemented by the Central Bank have reversed the expansionary monetary policy stance adopted during the pandemic, which would facilitate a 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 continuously monitoring global financial conditions and the expectations of economic agents, in order to take the necessary measures to maintain price stability.”.
In the international environment, uncertainty remains high due to the armed conflict between Russia and Ukraine, which has led to a deterioration of global economic projections.
The issuing body reiterated 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 (2,200 basis points), Brazil (1,125 basis points), Chile (925 basis points), Paraguay (725 basis points), Colombia (725 basis points), Costa Rica (675 basis points), Peru (575 basis points), Uruguay (525 basis points), Mexico (350 basis points), Nicaragua (150 basis points) and Guatemala (50 basis points).
“Domestically, the Dominican economy maintains strong momentum, registering year-on-year growth of 5.8% in June of this year, which has allowed the accumulated expansion during the first half of 2022 to reach 5.6%, above its potential. The positive evolution of economic activity has contributed to a significant improvement in the labor market,” he noted.
He reiterated that, “despite the complex international outlook, forecasting models point to economic growth of around 5.0% by the end of 2022, one of the highest expansions among emerging economies and the region, consistent with what has been indicated by international organizations such as the IMF and the World Bank.”.
He emphasized that “the positive evolution of foreign exchange generating activities has favored the relative stability of the exchange rate, reflected in an appreciation of the local currency of approximately 5.0% at the end of July, which contributes to counteracting the impact of the imported component on prices and, therefore, to the gradual convergence of inflation to the target.”.
He also indicated that international reserves have been strengthened to around $14.2 billion, equivalent to about 13.0% of GDP and about six months of imports, exceeding the metrics recommended by the IMF.
“It is important to highlight that the Dominican economy is in a good position to mitigate this adverse shock, taking into account the strength of the macroeconomic fundamentals, the resilience of the productive sectors and the high levels of international reserves,” he said.
