Inflation control is the reason for existence of central banks. When this macroeconomic variable jumps above the expectations and projections of the authorities, putting the stability of the economy in check (or at risk), decisions come into play to bring it to the equilibrium point.
The Dominican economy, like those of the rest of the world, faced inflationary pressures in a context of a pandemic due to covid-19, logistical problems in world transport and, during the last year, due to the unfailing effects of the Russian invasion. in Ukraine. No one has escaped its harmful or detrimental effects.
The monetary authorities, forced by circumstances, had to lower the monetary policy rate to give liquidity to the market, in order to avoid the bankruptcy of companies, massive job losses and the collapse of the productive sectors.
Monetary expansion and the reopening of the economy resulted in an increase in consumption, causing a general rise in prices that forced central banks to resume their restrictive policy to curb inflation.
The issue now is that after such an important goal for central banks, such as putting a stop to the high cost of mass consumption items, it also has an effect on growth. Putting a brake on consumption affects the growth target.
After 2021 with 12.3% growth, which served to recover the -6.7% of 2020, the economy began a slowdown process that has become even more accentuated during 2022 and so far in 2023. In fact, the economy grew 4.9% last year.
The monthly index of economic activity (IMAE), published by the BC, establishes that in January 2022 this indicator marked 7.8%, while in February it had already fallen to 6.7% and 5.9% in March. In December it ended at 2.5%, which represents a drop of 5.3 percentage points compared to the first month of the year.
It is this behavior of the economy that is just beginning to worry the authorities, as is logical, based on the interest and the goal of achieving a GDP expansion that is sufficient to generate quality jobs and added value to the economic sectors.
In this context, there are two signs that suggest that the monetary authorities will propose a possible reduction in interest rates: reduction in year-on-year inflation, which went from a maximum of 9.64% in April 2022 to 5.90% in March 2023 and, secondly, there is the loss of speed in economic growth.
At the annual meeting of the IMF and the World Bank in Washington, the governor of the Central Bank, Héctor Valdez Albizu, said that the forecast models indicate that inflation would converge to the target range of 4.0% ± 1.0% in the middle of this year, “ which would grant the spaces to opportunely begin to normalize the monetary position and support economic growth”.
Although he affirmed that this institution is currently focused on the fight against high inflationary pressures, through the adoption of opportune monetary measures, the truth is that the monetary policy rate (TPM) reaches five months without variation, at the same time that the GDP slows down its expansion.
According to the baseline forecasts of the International Monetary Fund (IMF), global growth will fall from 3.4% in 2022 to 2.8% in 2023, before stabilizing at 3.0% in 2024. The institution expects advanced economies to experience a slowdown in growth especially pronounced, from 2.7% in 2022 to 1.3% in 2023.
In a reasonable alternative scenario with increased stress on the financial sector, he estimates that global growth slows to about 2.5% in 2023, while growth in advanced economies falls below 1%. In the base scenario, the headline level of inflation declines from 8.7% in 2022 to 7.0% in 2023 due to lower commodity prices, although it notes that core inflation is likely to decline more slowly.
The IMF is pessimistic about achieving a price reduction in line with the economies’ plans, as it estimates that in most cases it is unlikely that inflation will return to the target level before 2025.
Regarding the local economy, which achieved growth of 12.3%, the Dominican Central Bank explains that this performance was achieved despite the challenging global situation, which was affected during 2022 by the significant impact of two successive events, the first being the lagged effects of the covid-19 pandemic and the second the Russian invasion of Ukraine.
The consequences of these events, the Central Bank maintains, were reflected in restrictions on the aggregate supply and inflationary pressures at a global level due, mainly, to the disruptions in the supply chains, the high prices of raw materials (commodities) in the markets international markets for much of the year, including oil, and the increase in container transportation costs. As a consequence, he points out, most countries, including advanced and emerging economies, adopted a restrictive monetary stance to control upward pressure on prices.
The Central American economies, with the exception of Honduras, adopted a restrictive monetary policy stance, following the line of other central banks in the world. Costa Rica, the most ambitious economy in terms of its interest rate, after having increased it to 9.0% between September 2022 and January this year, decided to lower it 50 basis points since February, which responds to fears of a slowdown in economic economics.
In fact, Costa Rica has gone to extremes when it comes to monetary policy. His pulse has not trembled to make any decision, either up or down. When the pandemic was declared, it was the country that lowered its TPM points, placing it at 0.75% for a period of 18 months, but later it was the one that changed its position the fastest, bringing its rate to 9.0% per year.
The case of Honduras is emblematic in the region. Its economy grew 2.7% in 2019, fell -9.0% in 2020, due to the pandemic, but recovered in 2021 by growing 12.5%, similar to that of the Dominican Republic. The authorities of this country have decided to maintain its TPM for 30 consecutive months at 3.0%, all with the aim of stimulating the productive sectors.
Since February of this year, the Dominican Republic and Costa Rica have walked together in terms of their monetary policy rate, setting it at 8.5%. The second country in Central America with the highest TPM is Nicaragua, which corresponds to the monetary reference rate, which is the one used by the central bank of that nation to indicate the cost in córdobas of liquidity operations at one day term. In this case, the rate is at 7.0%, a decision that has been maintained for the last five months.
According to the Dominican Central Bank, the downward behavior of inflation is consistent with the transmission mechanism of its monetary policy, which has been reflected in liquidity conditions that have moderated the growth rate of monetary aggregates and contributed to mitigating the pressures of domestic demand in combination with government subsidies for fuel and electricity rates.
The consumer price index (CPI) registered a monthly variation of 0.21% in March 2023. With this result, year-on-year inflation stood at 5.90% at the end of March. This rate corresponds to the lowest verified in the last 27 months, that is, since December 2020. The slowdown experienced by inflation allows us to project that it would be converging to the target range of 4% ± 1% by mid-2023.
Regarding interannual subjacent inflation, it stood at 6.16% as of March 2023, lower than the rates of 6.60% and 6.40% observed in the months of January and February of this year, respectively.
This indicator makes it possible to extract clearer signals for the conduct of monetary policy since it excludes some items that do not respond to monetary conditions, such as foods with great variability in their prices, as well as fuels and services with regulated prices such as electricity rates, transportation, in addition to alcoholic beverages and tobacco.