The Central Bank of the Dominican Republic (BCRD), at its monetary policy meeting in May 2022, decided to increase interest rate Monetary policy at 100 basis points, from 5.50% per year to 6.50% per year. In this way, the rate of perpetual liquidity expansion facility (one-day repurchase agreements) increases from 6.00% to 7.00% per annum and the deposit rate (overnight) from 5.00% to 6.00% per annum.
This decision is based on a comprehensive assessment of the recent behavior of the global economy and its impact on inflation, influenced by recent geopolitical conflicts and the global cost shock. In this arrangement, price dynamics were affected by more stable external factors than expected, associated with a noticeable increase in the prices of oil and other important raw materials for domestic production, as well as higher costs for international container transportation and other disruptions. in supply chains. In addition to these external components, adjustments in tariffs for private and public domestic services have affected the upward trend of inflation in recent months.
In particular, the monthly variance of the Consumer Price Index (CPI) in April 2022 was 0.96%; While the annual inflation rate, i.e. in the past 12 months, was 9.64%. On the other hand, year-over-year core inflation, which excludes the most volatile components of the basket, stood at 7.25% in April, reflecting second-round production effects linked to external supply shocks.
To counter external factors on prices, the central bank Since the end of last year, a monetary normalization plan has been implemented by increasing interest rates and liquidity control measures, with the aim of facilitating the convergence of inflation with the target range. In this sense, by the decision of May, the Bahrain Peacebuilding Office gradually and wisely increased monetary policy rate On five occasions since November 2021, until it reached its current level of 6.50% per annum, in line with the cycle of interest rate increases internationally.
In a complementary way, the Bahrain Development and Cooperation Bank has reduced the excess liquidity of the financial system by about R$80 billion this year, through open market operations and the gradual return of resources granted during the pandemic. These measures have succeeded in accelerating the mechanism of monetary policy transmission, which contributed to the adjustment of domestic interest rates and a significant moderation in the growth of monetary aggregates.
This process of monetary normalization seeks to avoid the risks of economic overheating that leads to a deepening of inflationary pressures of external origin, as well as a deterioration of the spread with respect to foreign interest rates It can cause fluctuations in the flow of capital. In this active monetary policy scenario, the BCRD will constantly monitor international financial conditions and the expectations of economic agents, to take measures for the gradual convergence of inflation to the target range of 4% ± 1% over the monetary policy horizon.
In the international environment, uncertainty remains high due to the conflict between Russia and Ukraine, which has caused the global economic outlook to deteriorate. In this sense, global growth forecasts continue to be revised downward
It reaches 3.1% in 2022 according to consensus expectations, while international inflation expectations continue to rise.
In the USA, our main trading partner, growth eased to 3.5% y/y in the first quarter of 2022, which equates to a 1.5% y/y quarterly contraction. On the other hand, that country’s annual inflation rate was 8.3% in April, four times higher than the 2.0% target for average inflation. In this context, the Federal Reserve (Fed) has raised the federal funds rate by 75 basis points this year, placing it in a range of 0.75% to 1.00% annually. For the rest of 2022, financial market analysts expect further increases in the reference price of about 200 basis points. Similarly, other advanced economies such as the United Kingdom and Canada are accumulating increases in their monetary policy rates by 90 basis points and 75 basis points, respectively.
As for the Eurozone, growth forecasts have also been revised downward, with a 2.7% expansion expected in 2022 according to consensus; While the annualized inflation rate reached 8.1% in May, the highest rate in the history of this bloc of countries. although European Central Bank (ECB) monetary policy rate Still at 0%, the latest statements from European Central Bank President Christine Lagarde indicate that this institution is ready to increase the reference rate from July of this year, while announcing the end of the monetary expansion program launched during the pandemic.
In Latin America, almost all central banks in the region have continued to increase their benchmark rates since 2021 to counteract high inflationary pressures, as in Argentina (1,100 basis points), Brazil (1,075 basis points), Chile (775 basis points), Paraguay (650 basis points). ), Peru (475 basis points), Uruguay (475 basis points), Colombia (425 basis points), Costa Rica (325 basis points), Mexico (275 basis points), Nicaragua (100 basis points) and Guatemala (25 basis points). ).
In terms of raw materials, the price of a barrel of Texas Intermediate (WTI) oil has recorded significant increases in recent months, rising from an average of $83 a barrel during January 2022 to an average of $110 a barrel during the month of May, to finally be traded . About $118 a barrel. Similarly, international prices of primary food commodities, such as corn, wheat, sorghum and soybeans, as well as fertilizers, remain high due to the armed conflict.
In the domestic environment, the Dominican economy has maintained a good performance during the current year, recording a cumulative growth of the monthly economic activity index (IMAE) of 5.8% during the first four months of 2022, one year later. Annual expansions of 4.7% during the month of April. The positive development of economic activity during this year was driven by the recovery of tourism, as well as the dynamism of construction, trade, transport and free zones.
Going forward, the growth prospects of the Dominican economy are becoming more conservative due to the high uncertainty prevailing in the international environment. In this sense, economic growth is expected to be around 5.0% for this year, close to its potential and above expectations for expansion for a year Latin America by 2.1%.
On the other hand, the credit granted to the private sector in the national currency maintains its dynamic, expanding year on year to approach 12% in May. In terms of fiscal policy, the higher groups stand out in relation to what was estimated, which provided the space for the application of measures aimed at mitigating the impact of price hikes.
Raw material prices on national production and households, especially the most vulnerable.
In the external sector, the dynamism of exports and tourism continues; As well as transfers, which amounted to about 3.2 billion US dollars during the first four months of the year. The updated forecast indicates a current account deficit of between 3.0% and 3.5% of GDP for this year, which can be comfortably covered by the FDI forecast for the end of 2022, which will exceed 3.4 billion US dollars. In this sense, the positive performance of foreign exchange generating activities will partially offset the impact of higher prices for oil and other imported raw materials.
Similarly, international reserves remain at historically high levels, around 14,250 million US dollars, equivalent to 13.3% of GDP and about 6 months of imports, exceeding the measures recommended by the International Monetary Fund. These factors helped to achieve the relative stability of the exchange rate, which was reflected in the cumulative appreciation of the local currency by about 4.0% at the end of May, which should help offset imported inflationary pressures.
It is important to highlight that the file Dominican Economy It is well positioned to mitigate this adverse shock, given the strength of macroeconomic fundamentals, the good performance of domestic demand and the high levels of international reserves. The Central Bank of the Dominican Republic reaffirms its commitment to managing monetary policy in order to achieve its own inflation target and the proper functioning of the financial and payment systems, for which it will continue to monitor the international situation and inflationary pressures, with a view to adopting additional measures in the face of factors that may endanger price stability.