Monday, December 11, 2023

Central Bank keeps the monetary policy rate the same

The Central Bank of the Dominican Republic (BCRD) reported that it will keep its monetary policy interest rate (TPM) unchanged at 8.50% per year. Likewise, the rate of the permanent liquidity expansion facility (1-day Repos) remains at 9.00% per year and the rate of interest-bearing deposits (Overnight) continues at 8.00% per year.

This decision is based on an exhaustive evaluation of the recent behavior of the economy, especially inflation. In that order, the moderation in the international prices of raw materials is maintained, while the costs of container transport and disruptions in global supply chains continue to fall. At the domestic level, inflation continues to decline as a result of the monetary restriction program, the subsidies implemented by the Government and the moderation of domestic demand.

Indeed, the monthly variation of the consumer price index (CPI) was 0.21% in March; contributing to a decrease in general inflation of 374 basic points, going from a maximum of 9.64% in April 2022 to 5.90% in March 2023. For the month of April, the forecast models indicate that year-on-year inflation would fall even further. more, until reaching around 5.20%. Meanwhile, core inflation, which excludes the most volatile components of the basket, also shows a downward trend, going from 7.29% in May 2022 to 6.16% in March 2023, projecting that it could decrease to approximately 5.8%. in April.

This reduction in inflationary pressures reflects the effectiveness of the monetary policy transmission mechanism, after the gradual increase of the MPR by 550 basis points between November 2021 and October 2022. In that order, the monetary measures have contributed to the real interbank rate is above its estimated neutral level and to an increase in commercial bank interest rates, mainly in passive interest rates. In this way, a favorable interest rate differential has been maintained with respect to that of the United States of America (USA), encouraging greater flows of capital and foreign investment to the country, in addition to promoting savings in national currency.

In addition, monetary aggregates have slowed down notably, especially the medium in circulation (M1), which has gone from growing from a maximum of 30% year-on-year during 2021 to expanding around 10% in April 2023, consistent with the nominal GDP expansion and with what is stipulated in the Monetary Program. On the other hand, private credit in national currency is beginning to show signs of moderation, going from year-on-year growth of close to 15% at the end of 2022 to expansion of around 13% in April 2023.

Under current forecasts, it is estimated that the TPM and liquidity of the economy are at adequate levels for inflation to converge to the target range of 4% ± 1% over the next few months. The return of inflation to the target range would grant the necessary space for the BCRD to ponder the opportune moment for the adoption of measures that contribute to the gradual return of economic growth to its potential, preserving macroeconomic stability.

In the international environment, in its most recent report on the World Economic Outlook, the International Monetary Fund (IMF) forecasts global growth of 2.8% for 2023. Meanwhile, global inflationary pressures will continue to moderate associated with lower commodity prices. during the present year.

In the US, year-on-year growth stood at 1.6% during the first quarter of 2023, driven mainly by private consumption. In this context, the US economy is expected to grow by 1.6% in 2023, according to the IMF. On the other hand, year-on-year inflation in that country has continued to slow down to 5.0% in March 2023, although it remains above its target of 2.0%. Given this scenario, the Federal Reserve (Fed) has increased the federal funds rate by 475 basis points since March 2022 and most analysts expect an additional 25 basis point increase at the May 2023 meeting.

In the Euro Zone (ZE), economic activity expanded by 1.3% year-on-year during January-March 2023, projecting growth of 0.8% during 2023, affected by the conflict between Russia and Ukraine. Meanwhile, year-on-year inflation has moderated to 6.9% in March, although it remains high compared to the 2% target.

The European Central Bank has increased its MPR by 350 basis points since July 2022 and has announced that it will continue to respond as necessary to ensure a return to the inflation target and financial stability in this bloc of countries.

In Latin America, central banks maintain monetary policy rates significantly above pre-pandemic levels, such as Argentina (reference rate at 91.00%), Brazil (13.75%), Colombia (13.25%), Uruguay (11.25%) ), Chile (11.25%), Mexico (11.25%), Paraguay (8.50%), Dominican Republic (8.50%), Peru (7.75%), Costa Rica (7.50%), Nicaragua (7.00%) and Guatemala (5.00 %). As a result, regional inflation has moderated in recent months, motivating most central banks to hold a pause in MPR increase cycles.

In the domestic environment, the Monthly Indicator of Economic Activity (IMAE) registered an interannual growth of 2.1% in March 2023, higher than the expansions of 1.8% in February and 0.4% in January. In this sense, the average year-on-year growth during the first quarter was 1.4%, as a reflection of the expected moderation of domestic demand and the deterioration of the international environment in a context of greater uncertainty.

For the rest of the year, economic activity is expected to continue to recover gradually, supported by the dynamism of tourism and greater public investment. In this way, it is expected that the Dominican economy would remain one of the fastest growing in the region, consistent with what is projected by international organizations such as the IMF and the World Bank.

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 around 3.0% at the end of April 2023.

This behavior of the external sector has facilitated the strengthening of international reserves, which are located around US$16.2 billion, equivalent to 13.3% of GDP and more than six months of imports, above the metrics recommended by the 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 assures that it reaffirms its commitment to conduct monetary policy towards achieving its inflation target and the proper functioning of the financial and payment systems.


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