6.50 to 7.25% – High uncertainty forces the Central Bank to raise the rate

Santo Domingo, DR.

The Central Bank today announced the increase in the monetary policy rate from 6.50% to 7.25%, an increase of 75 basis points.

In a statement, the monetary and financial authority indicated that the permanent liquidity expansion facility rate (1-day repos) increases from 7.00% to 7.75% per year and the interest-bearing deposit rate (Overnight) from 6.00% to 6.75% per year.

He explained that this decision is based on an exhaustive evaluation of the recent behavior of the world economy and its impact on inflation, influenced by geopolitical conflicts and the shock of global costs.

It states that price dynamics continue to be affected by external factors which have been more persistent than expected, associated with the extraordinary increase in the prices of oil and other raw materials, as well as the high costs of international container transport and other disruptions in supply chains.

In addition, it refers that to these external components, In recent months, internal pressures have begun to appear to the extent that aggregate demand has recovered notably in relation to pre-pandemic levels and the rates of various services in the economy are adjusted.

Year-on-year inflation 9.47%

In particular, the monthly variation of the consumer price index (CPI) stood at 0.49% during May 2022, while interannual inflation, that is, in the last 12 months, moderated slightly to 9.47%.

In its statement, the Central Bank details that year-on-year underlying inflation, which excludes the most volatile components of the basket, reached 7.29% in May, reflecting second-round effects on production associated with supply shocks of external origin and internal pressures from demand.

“To help counteract inflationary pressures, the Central Bank has significantly reduced the excess liquidity of the financial system, through open market operations and the gradual return of the resources that had been granted during the pandemic, ”says the bank.

He added that these measures have succeeded in accelerating the monetary policy transmission mechanism, contributing to the adjustment in domestic interest rates and a significant moderation in the growth of monetary aggregates.

international environment

In the international environment, uncertainty remains high due to the military confrontation between Russia and Ukrainewhich has caused a deterioration in the global economic outlook.

In this sense, the forecasts for world growth continue to be revised downwards to 2.9% in 2022 according to Consensus Forecasts, while international inflation projections continue to increase.

In United States of Americaour main trading partner, growth has moderated to 3.5% YoY in the first quarter of 2022, equivalent to an annualized QoQ contraction of -1.6%.

Year-on-year inflation in that country reached 8.6% in May, the highest in four decades and more than four times higher than the 2.0% target for average inflation. In this context, the Federal Reserve (Fed) increased the reference rate by 75 basis points in June, accumulating an increase of 150 basis points this year and indicating that they would be making additional adjustments.

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