2023-06-29 20:34:45
The Central Bank of the Dominican Republic (BCRD), at its monetary policy meeting in June 2023, decided to reduce its monetary policy interest rate (TPM) by 25 basis points, from 8.00% to 7.75% per year. Additionally, the rate of the permanent liquidity expansion facility (1-day Repos) goes from 8.50% to 8.25% per year; while the rate of remunerated deposits (Overnight) is reduced from 7.50% to 6.75% per year. These decisions will contribute to reducing the financing costs of financial institutions and will have an impact on lower interest rates in the financial system.
The measures adopted take into account the reduction of domestic inflation, which is within its target range of 4.0% ± 1.0%, as a result of the monetary and fiscal policies implemented, the lower pressures of internal demand and the decrease in prices. international commodity prices.
Indeed, the monthly variation of the consumer price index (CPI) was -0.20% in May; contributing to a drop in year-on-year inflation of 521 basis points, going from a maximum of 9.64% in April 2022 to 4.43% in May 2023. Furthermore, the forecast models indicate that year-on-year inflation would maintain its downward trend. low, settling around the central value of the target range of 4.0% at the end of June. Similarly, core inflation, which excludes the prices of the most volatile components of the basket, has decreased from 7.29% in May 2022 to 5.51% in May 2023.
As a result of the convergence of inflation to the target range earlier than expected, the BCRD has begun to normalize its monetary policy stance. In that order, the cumulative reductions of 75 basis points in the TPM (50 basis points in May and 25 basis points in June) have been complemented with additional liquidity provision measures, in order to facilitate financing of the productive and households in favorable conditions. This set of measures is helping to speed up the transmission mechanism of monetary policy and would facilitate growth in the second half of the year, in a context in which inflation would remain within the target range on the monetary policy horizon.
Additionally, this decision took into consideration the recent dynamics of the world economy and its prospects. In particular, economic activity in the United States of America has been more resilient than expected, with first-quarter growth revised upward to 1.8% year-on-year and a labor market at full employment. However, growth for the end of the year is expected to stand at 1.3%, lower than the 2.1% in 2022.
On the other hand, inflation in that country has continued to slow down to 4.0% in May 2023, although it remains above its target of 2.0%.
Given this scenario, the Federal Reserve has made cumulative increases of 500 basis points in its reference interest rate and, despite taking a pause at its last meeting, has indicated that it expects additional increases in the second half of the year.
In the Euro Zone (ZE), a growth of just 0.6% is projected during 2023, affected by the war between Russia and Ukraine that has caused recessive conditions in this block of countries. Meanwhile, year-on-year inflation in the ZE has moderated to 6.1% in May, although it remains high compared to the target of 2.0%. In this context, the European Central Bank has increased its TPM by 400 basis points since July 2022, with the expectation that it will carry out additional increases to guarantee the return of inflation to the target.
In Latin America (LA), inflation has decreased in recent months, with the Dominican Republic, Brazil and Costa Rica standing out as the only countries in the region that have achieved inflation reaching its target range this year. In this context, most of the central banks of LA have paused in the increases in their reference interest rates, with the exception of the Dominican Republic, Costa Rica and Uruguay, which have recently decreased them.
In the domestic environment, the Monthly Indicator of Economic Activity (IMAE) grew by 2.4% year-on-year in the month of May, registering a slight improvement in relation to the behavior of the first four months of the year. In this way, in the period January-May 2023, the economy expanded by an average of 1.4% year-on-year, as a result of a moderation in domestic demand and the deterioration of the international environment in a context of greater uncertainty. It is important to highlight the positive behavior of service activities, mainly the hotels, bars and restaurants sector, which has mitigated the slowdown in other sectors, such as construction and manufacturing. For the rest of the year, a greater dynamism of economic activity is expected, supported by the implementation of monetary stimulus measures, greater public investment and the boost of tourism.
In that order, since June, monetary conditions reflect the acceleration of the monetary policy transmission mechanism, with a reduction in commercial bank interest rates, especially the lending interest rate, which has been reduced by around 400 basis points during the current month. At the same time, the private credit portfolio in national currency has increased by some RD$ 60 billion in net terms during June and is expanding by more than 16% year-on-year, driven by the rebound in loans to the productive sectors.
On the other hand, the good performance of foreign exchange generating activities has contributed to the stability of the Dominican peso, which registers an accumulated appreciation of approximately 1.7% at the end of June 2023. This behavior of the external sector has facilitated the strengthening of reserves international markets, which are around US$16.2 billion, equivalent to 13.2% of GDP and six months of imports, above 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, taking into account the strength of the macroeconomic fundamentals and the resilience of the productive sectors. The Central Bank of the Dominican Republic says that it reaffirms its commitment to conduct monetary policy towards achieving its inflation target and preserving macroeconomic stability.
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