The Central Bank of the Dominican Republic (BCRD) raised its monetary policy rate by 25 basis points to 5.75 percent, noting the rise in February inflation, economic activity above the country's potential and an increase in credit to the private sector in excess of nominal growth.
It is the first rate hike by the BCRD since a 50-point rate hike in November last year when the central bank raised its rate in what it said was a preventative month reflecting the risks to inflation.
In February the International Monetary Fund (IMF) said the central bank's tightening bias was appropriate given upside risks to inflation from global financial conditions and progress toward a more flexible exchange rate framework should continue
The rate hike will take effect on April 3, the central bank said in a statement released today following a monetary policy meeting on March 30.
Inflation in the Dominican Republic jumped to 3.34 percent in February after remaining below the central bank's target range of 3 - 5 percent, around a 4.0 percent midpoint, for the last 30 months. Inflation in January rose to 2.33 percent from 1.7 percent in December and 0.9 percent in December.
The BCRD said it still expects inflation to be around its target in the forecast horizon.
Economic activity continues to expand above potential although it is expected to converge to this level in the medium term. As of February, the trend in the monthly economic activity indicator grew by an annual rate of 5.5 percent, as the bank expected.
Credit to the private sector in local currency, however, grew by an annual rate of around 11 percent by the end of March, above nominal product growth.
On the fiscal side, public finances point to a primary surplus of 0.8 percent of Gross Domestic Product in 2017 compared to a budget objective of a deficit of 2.3 percent, with the current account deficit ending 2016 at 1.5 percent of GDP, the lowest level in a decade, boosting reserves.
As of March, the central bank's international reserves remain above US$6.2 billion, up from $6.047 billion in January, a level that was considered a historically high.
The Dominican peso has been slowly and steadily depreciating since 2007 but has been trading sideways in the last month, with the IMF strongly supporting authorities plan to move toward a more flexible exchange rate by building up market infrastructure and instruments.
The peso was quoted at 47.3 to the U.S. dollar today, down 2.3 percent this year.