BCRD increases its monetary policy rate to 5.50% per annum

SANTO DOMINGO – At its monetary policy meeting in July 2018, the Central Bank of the Dominican Republic (BCRD) decided to raise its policy rate by 25 basis points from 5, 25% to 5.50% per year. According to the BCRD's short-term liquidity management system, the overnight deposit rate drops from 3.75% to 4.00% per annum and the rate of permanent expansion facilities (repos) passes. from 6.75% to 7.00

The decision to increase the benchmark rate was based on a comprehensive analysis of the risk balance around inflation projections, the main national macroeconomic indicators , the relevant international environment, market expectations and forecasts. medium term. During the first six months of the year, cumulative inflation was 1.43%, so that the annual inflation from June 2017 to June 2018 was 4.63%, higher than the mid-point of the target range of 4.0% ± 1.0% Prior to the meeting, inflation forecasts in a passive scenario indicated a gradual upward trend, due to higher oil prices, higher oil prices, domestic demand pressures and increased uncertainty in the financial markets. international, so that it was obvious that the need for a change of position in monetary policy to achieve compliance for the purpose in the two-year political horizon.

In the external environment, there is a positive trend, but with moderate growth in some advanced economies. According to the consensus forecast, real output would increase by 3.3 percent in 2018 and by 3.2 percent in 2019. The United States of America would continue to lead the industrialized countries with an economy that runs to full employment and which presents growth projections for 2.9% in 2018 and 2.6% in 2019. It would be followed by the economy of the euro zone (ZE), whose real product would increase respectively by 2.2% and 1.8% in those years. Due to the buoyancy of the United States and rising oil prices on the international market, inflationary pressures have increased in this country. To counteract them, the Federal Reserve (Fed) continued its monetary normalization process, raising the key rate by 50 basis points since the beginning of the year. Fed rate adjustments will continue for the remainder of 2018 and 2019.

As the United States moves forward in the normalization of its monetary policy, international financial conditions become less favorable, which increases risk and long-term interest rates for emerging economies. Higher interest rates in the United States also generated a dollar appreciation which, combined with rising oil prices, contributed to an increase in the depreciation of currencies in developing countries.

It is important to note that Despite this environment of changing international financial conditions, the economic performance of emerging countries maintains a positive trend. India would increase by 7.3% in 2018 and 7.5% in 2019, while China would increase by 6.6% and 6.4% respectively during those years. With regard to Latin America (LA), all economies, except Venezuela, would show positive growth this year. As a region, LA would increase 2.0% in 2018 and 2.5% in 2019, according to Consensus Forecast. It should be noted that this growth would occur despite the moderation seen in some large economies such as Argentina and Brazil.

In the national context, economic activity continues to evolve favorably, as evidenced by the trajectory of the monthly activity indicator. (IMAE). Indeed, according to preliminary data, the IMAE recorded a cumulative growth of 6.6% over the period January-May 2018. Thus, the trend-cycle of IMAE develops at an annual rate of 6.9% in May, projecting that the economy would continue to grow above its potential throughout the year. To the extent that this growth trajectory is maintained and generates pressures on future domestic prices, monetary policy will continue to move towards the withdrawal of the monetary stimulus measures launched last year. In this way, large gaps in the gap between domestic and US interest rates would be avoided, which could have an adverse macroeconomic impact.

In keeping with this evolution of the economy, the dynamism of domestic financial market, reflected in an increase in credit to the private sector in national currency above the estimated expansion of nominal GDP. In this sense, starting in July, private loans in local currency are growing at an annual rate of nearly 13%, while monetary aggregates are growing beyond those envisaged in the monetary program.

Since the beginning of the year, revenue from recoveries has been maintained in the environment of the budgeted amounts at the time a moderate level of expenditure is recorded, which has made it possible to achieve budget surplus in the first five months of the year. This public finance behavior would facilitate compliance with the deficit target established in the national budget. In the external sector, the dynamism recorded in the currency-generating activities contributed substantially to moderate the impact of rising oil prices on the Dominican economy. Similarly, international reserves have remained at historically high levels, contributing to the relative stability of the foreign exchange market.

The Central Bank of the Dominican Republic reaffirms its commitment to conduct monetary policy to achieve the goal of inflation and the maintenance of macroeconomic stability. In this sense, if necessary, the institution is ready to continue the normalization of its monetary policy in the months to come, according to the evolution of the world economy, as well as the main domestic risks . In addition to promoting inflation control and macroeconomic stability, monetary policy measures ensure the smooth functioning of financial and payment systems.