Friday, September 22, 2023

How quickly do Dominican banks react when the monetary policy rate changes?

In the Dominican Republic, the monetary policy rate (TPM) had not changed for six months. The Central Bank, at its monetary policy meeting in May 2023, decided to reduce its monetary policy interest rate by 50 basis points, from 8.50% to 8.00% per year.

Inflationary pressure is relatively controlled, which is why the monetary authority has begun to relax restrictive policies and adopt expansion measures to boost the local economy.

The clients of the financial system expect that with the reduction of the monetary policy rate, the commercial banks will also adjust their interest rates. However, there is the idea that when the monetary policy rate falls, banks are “faster” to reduce the passive rate and “slower” with the active rate, while when it rises they are slower to adjust the passive (the one that pay customers for their deposits) and more diligent in raising the asset (what customers pay for loans).

Why does this happen? Is it a bank strategy? Does it only affect customers? Do they all execute the same plan? Does time matter? The economists Roberto Despradel and Miguel Collado Di Franco agree, separately, that this idea “falls out of the bush” when observing the behavior of both rates in recent years.

Therefore they understand that it is more of a perception, since the statistics show another reality. Meanwhile, his counterparts Antonio Ciriaco and Haivanjoe Ng Cortiñas were more cautious when giving their opinion, since the movement of one rate or another depends on several factors.

Ciriaco, dean of the Faculty of Economics of the Autonomous University of Santo Domingo (UASD), explained that interest rates can vary quickly on one side and not on the other, because banks maintain an intermediation margin (profit) that should give them results.

The lending interest rate is the percentage that clients pay to banks when they receive a loan, while the reverse is the case with the passive rate (banks pay savers for keeping their funds in financial instruments).

In plain terms, when the lending rate falls, people are motivated to take more loans. On the other hand, when it goes up, clients will borrow less money. So, that less money financed indicates less consumption and investment. This implies an economic slowdown and perhaps job losses, but it also means controlling inflation.

Precisely, part of the strategy that the Central Bank has been implementing. The economist Ng Cortiñas told the money that financial intermediation entities (EIF), in addition to the TPM, take into account several factors before making changes in their active or passive rate.

“The composition of the banks’ portfolio, the delinquency rate, solvency, liquidity, competition and macroeconomic conditions are aspects that a bank examines to take a position on rates,” specified the former bank superintendent.


According to Central Bank statistics, in January 2023 the active interest rate marked a weighted average of 13.9% in multiple banks and rose to 15.8% in April of this year. The weighted average indicates that there are financings with higher interest rates, especially consumer loans, while others have lower levels, such as loans for the purchase of new vehicles and homes.

Meanwhile, the weighted average deposit rate went from 9.7% in January of this year to 9.9% in April. According to a report from the Regional Center for Sustainable Economic Strategies (CREES), between November 2021 and October 2022, the BC increased the TPM by 550 basis points, from 3.00% to 8.50%. From the increase in the TPM to date, the active interest rate has increased 5.5 percentage points, while the passive interest rate has increased 8.2 percentage points.

In this regard, Collado Di Franco, executive vice president of CREES, maintains that the pace shown by both rates is a clear sign that “if the TPM rises, banks do not really want to raise the lending rate quickly because they do not want to penalize their customers.” . He added “and more in a situation of change in policy, where the economy is recent and consequently customers may have less disposable income.”

Meanwhile, Despradel explained that the financial market adjusts upwards and downwards depending on the market and the BC.


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