The central bank and its narrative of growth and inflation

Santo Domingo, d

In building its narrative on the causes of inflation in the Dominican Republic, the central bank uses the same disinformation and manipulation techniques it uses when referring to post-Covid economic growth.

For example, the Central Bank stated, as I have indicated on other occasions, that during 2021 the Dominican economy achieved a growth of 12.3 percent of GDP. Nothing is more certain. In fact, this was the result of a statistical recovery, because in 2020, the year of the epidemic, the national economy experienced a decline of -6.7 percent.

In its official documents, the Central Bank acknowledges this. He points out in his report on monetary policy issued on January 31 of this year 2022 that:

“In the domestic environment, the recovery process of aggregate demand has strengthened, highlighting an annual growth of 12.3 percent…equating to a real expansion of 4.7 percent compared to 2019.”

Thus, according to the Central Bank itself, the real expansion of our economy was not 12.3 percent, but only 4.7 percent.

But they continued to insist that the figure was 12.3 percent, which conveys the impression not only that there is no crisis in the Dominican Republic, but that we are the country with the highest level of growth in the world.

However, when it is stated that the Dominican economy will expand this year, 2022, by about 5.5 and 6.0 percent of GDP, it is not indicated that this will represent a decrease of more than 6 percent of GDP, in relation to 2021, which according to Official accounts were 12.3 percent.

On the contrary, 5.5 or 6 percent is now said to be higher than the potential growth of our economy, which highlights its good performance, as well as its strong and resilient character.

The irony obviously couldn’t be greater.

inflation

And in the same document that we mentioned, the main monetary authority in the country, referring to the phenomenon of inflation, stated:

“In the Active Monetary Policy scenario, annual inflation, which reached 7.72% in October 2021, will converge to the 4+1 target band during the second half of 2022, at a progressively more rapid pace than originally expected.”

By saying that convergence to the target range for inflation will occur at a more gradual rate than originally expected, the central bank admits it was a mistake. That’s right, having forecast inflation to reach 4+1 before the second half of this year.

But he erred again in his second prediction, because not even by a miracle of La Altagracia, during the remaining three months of this year, between September and December, it would be possible to reach the inflation target which, at present, is 8.64 per cent.

To curb the rising cost of living affecting Dominican society, the central bank implemented what the entity itself described as a “gradual plan to normalize monetary policy.”

That plan began with an increase in the monetary policy rate by 50 basis points, from 3.00 percent to 3.50 percent, with the aim, as we said, of reducing the inflation rate and achieving price stability.

the reasons

For the main monetary entity of our country, the current rise in prices affecting the national economy depends only on external factors.

Among these factors are the rising prices of oil and other raw materials. disruption of global production and distribution chains; the increase in the costs of international transport by containers; and geopolitical tensions resulting from the Russian invasion of Ukraine.

Undoubtedly, all these factors contributed to the rise in prices around the world and in the Dominican Republic, but what is remarkable is that the Central Bank does not mention any of the national nature.

Is the increase in the cost of sea freight the main reason for the central bank to raise monetary policy rates? Is this because of disruption in global value chains or because of geopolitical conflicts? None of that. The main reason is due to the central bank’s policy of monetary expansion to revitalize the growth of the economy, which has collapsed as a result of the Covid-19 pandemic.

At this point in monetary policy expansion, the central bank issued about 215 billion pesos. Now, to curb inflation, the central bank has to reverse this monetary expansion policy.

On the contrary, it has had to adopt restrictive monetary measures, due to which, due to the high interest rate of commercial banks and low liquidity in the financial system, there will be little money circulating in the market.

From November 2021 to August of this year, the central bank raised the monetary policy rate eight times, rising from 3.00 percent to 8.00 percent.

This restrictive monetary policy does not apply only in the Dominican Republic. It is also happening globally. This is what the Federal Reserve does in the United States. European Central Bank; The Central Banks of Latin America.

By implementing a restrictive monetary policy, there is awareness in all these places of the possibility of a recession; Or at least declining economic growth and increasing unemployment.

Except in the Dominican Republic, of course, where the central bank appears to have found the overarching magic formula to hit the inflation target, at the same time as boosting growth and increasing job creation. Of course, whoever succeeds in simultaneously achieving all these goals, which are incompatible with each other, deserves a special award, in recognition of his ability to manipulate and distort reality, defying the laws of logic and common sense.

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