Santo Domingo, Dominican Republic – During the December monetary policy meeting, the Central Bank of the Dominican Republic (BCRD) decided to keep its monetary policy interest rate unchanged at 8.50% per year for the second month this year. In addition, the rate of the permanent liquidity expansion facility (Repos for 1 day) remains at 9.00% per year and the rate of remunerated deposits (Overnight) continues at 8.00% per year.
The issuing institute indicates that its decision is based on a thorough evaluation of the recent behavior of the economy, especially inflation. Commodity prices, particularly oil, have moderated during the second half of the year, while global container transport costs have been reduced. At the domestic level, the inflationary dynamic has responded in recent months to the monetary restriction program and the measures implemented by the Government through subsidies for fuels, energy 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. In this way, annual inflation has been reduced by about 206 basis points, from a maximum of 9.64% in April to 7.58% in November.
In addition, underlying inflation, which excludes the most volatile components of the basket such as fuels, electricity tariffs and some foods, has declined from 7.29% in May to 6.59% in November. In a statement, the BCRD emphasized that underlying inflation is one of the main indicators considered for the decision-making of central banks, as its behavior is more closely associated with current monetary conditions, so the results obtained reflect the effectiveness of the economic policies adopted to counteract inflationary pressures.
In that sense, the Central Bank has increased its monetary policy rate by 550 basis points since November of last year. The timely reaction 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 stance is contributing to mitigate internal demand pressures, consistent with underlying inflation that is below the general price variation.
In addition, monetary aggregates have slowed significantly and there has been an increase in multiple bank interest rates, mainly in the passive rate, that is, deposits, as a result of a more than complete transfer of monetary decisions. In this way, a favorable differential has been maintained with respect to the interest rates of the country’s main trading partners, contributing to greater flows of capital and foreign investment, in addition to encouraging savings in national currency.
Under current projections, it is estimated that the monetary policy rate is at an adequate level for annual inflation to converge to the target range of 4% ± 1% before the end of the first half of 2023, as the transmission mechanism of monetary policy continues to operate. In that order, the Central Bank will continue to monitor the evolution of external and domestic economic conditions to take the necessary measures to preserve macroeconomic stability.
Indeed, geopolitical tensions have caused a deterioration of global economic projections. In this order, Consensus Forecasts predicts that global economic growth would decrease from 2.8% this year to 1.5% in 2023, while global inflationary pressures would continue to moderate with lower commodity prices projected for next year.
In the United States, a growth of 1.9% is projected for 2022 and a slight expansion of 0.2% for 2023. On the other hand, annual inflation has slowed, from 9.1% in June to 7.1% in November, although it remains well above its target of 2.0%.
In this context, the Federal Reserve (Fed) began to moderate the magnitude of increases in its benchmark rate, accumulating an increase of 425 basis points in 2022. For next year, the Fed is expected to make more gradual increases in the interest rate as it approaches the end of its restrictive monetary cycle, considering the projections of lower inflation and weakness in economic activity.
As for the euro zone (ZE), economic conditions continue to be affected by the war conflict between Russia and Ukraine; projecting a growth of 3.2% for 2022 and a contraction of -0.1% for 2023. On the other hand, annual inflation stood at 10.1% in November, so the European Central Bank made an increase of 50 basis points to its benchmark rate at its last meeting, accumulating 250 basis points during this year and announced additional increases for 2023.
In Latin America, almost all central banks have increased their monetary policy rates significantly above pre-pandemic levels, such as Argentina (benchmark rate at 75.00%), Brazil (13.75%), Colombia (12.00%), Chile (11.25%), Uruguay (11.25%), Mexico (10.50%), Costa Rica (9.00%), Paraguay (8.50%), 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, so most central banks are moderating or pausing in cycles of interest rate increases.
In the domestic environment, economic activity expanded by 5.0% year-on-year during January-November 2022, after a more moderate growth rate was observed in recent months. Although international conditions have deteriorated, it is projected that the Dominican economy would grow around 5.0% for the end of 2022, close to its potential; while for 2023 it would expand by approximately 4.5%, remaining as one of the countries with the highest growth in the region. As a reflection of the dynamism of domestic demand, private credit in local currency expands by more than 14% year-on-year in December; while the financial system maintains high levels of solvency and profitability, with low indicators of delinquency.
In terms of fiscal policy, higher revenues than estimated are highlighted, providing the necessary space to apply subsidies aimed at mitigating the impact of higher prices of raw materials, as well as to boost public investment in the coming months, which was announced by the Government.
On the other hand, activities that generate foreign exchange (tourism, exports, remittances, and foreign direct investment) have maintained a positive performance, contributing to a appreciation of the Dominican peso of approximately 2% in 2022. This behavior of the external sector has facilitated the strengthening of international reserves, which are around US$14,300 million in December, equivalent to more than 12.5% of gross domestic product (GDP) and almost six months of imports, exceeding the metrics recommended by the International Monetary Fund (IMF).
It is important to highlight that the Dominican Republic is in a good position to continue facing the challenging international scenario. Indeed, the strength of macroeconomic fundamentals, the resilience of productive sectors, and sound policies have contributed to the positive assessment of international organizations on the Dominican economy, as recently noted by Standard & Poor’s when it raised the country’s credit rating from ‘BB-‘ to ‘BB’.
