Friday, November 26, 2021

Dominican Rep. raises rate and growth forecast

      The Central Bank of the Dominican Republic (CBDR) raised its key interest rate for the first time in more than three years as it enters the second phase of normalizing monetary policy, saying this step will ensure inflation converges to its target while the economic recovery continues to strengthen.
      CBDR raised its monetary policy interest rate by 50 basis points to 3.50 percent the bank said after a meeting of its monetary policy committee on Nov. 24.
       It was the central bank's first rate hike since July 2018 when the rate was raised to 5.50 percent. 
       With its rate hike, CBDR becomes the 100th central bank to raise its rate so far this year as central banks unwind last year's extraordinary monetary stimulus that has helped the global economy bounce back from the COVID-19 pandemic, boosting demand and inflation.
       A year later CBDR in July 2019 entered a monetary easing cycle with the rate cut five times and by a total of 2.50 percentage points, with the final cut in September 2020, the bank's second rate cut last year to cushion economic activity during the pandemic.
      In addition to the two rate cuts last year that totaled 1 percentage point,  CBDR also lowered the reserve requirements for financial institutions and boosted the amount of liquidity available to banks.
      The central bank has estimated financial institutions channeled more than 215 billion Dominican pesos  to companies and households since the beginning of the pandemic, and this also led to a 300 basis points decline in the weighted average lending rate of commercial banks and a boost in private loans.
      With economic activity in the Dominican Republic recovering the central bank in August this year raised its outlook for economic growth and began what it said was "an orderly plan of monetary normalization" as funds granted to firms and households through different liquidity facilities return they mature and are repaid.
      In September CBRD said it had recovered some 45 billion pesos of funds and estimated this amount could top 60 billion by the end of this year.
      Today, the central bank said it had decided to raise its key rate in a second stage of this normalization process with the purpose of preserving price stability to ensure inflation returns to its target.
      "Likewise, it will continue to evaluate the persistence of exogenous shocks on domestic inflation with the purpose of taking additional monetary measures that may be necessary to maintain economic agents' inflation expectations anchored," the bank said.
      In addition to raising its monetary policy rate today, CBDR also raised the rate on overnight deposits to 3.0 percent from 2.50 percent.
      Inflation in the Dominican Republic has been steady between 7 and 8 percent in the last four months - it was 7.72 percent in October, up from 7.74 percent in September but down from 7.9 percent in August - but still well above the bank's target range of 4.0 percent, plus/minus 1 percentage point.
      Cumulative headline inflation in the first 10 months was 6.56 percent while core inflation - which excludes the most volatile components - hit 6.31 percent in October, reflecting second round effects from higher production costs that is due to higher external inflation, CBDR said.
      The central bank forecast headline inflation would converge to its target in the second half of 2022, a more gradual pace than previously estimated.
      The latest economic activity indicator shows aggregate demand in the Dominican Republic growing 10.6 percent year-on-year in September for an accumulated increase of 12.7 percent in the first nine months of the year, the bank said, pointing to good performance in construction, local manufacturing, free trade zones, commerce along with the recovery of the hotel, bar and restaurant sector.
      CBDR raised its forecast for economic growth this year to around 10.7 percent from last month's forecast of 10 percent of more.
      In the second quarter of this year, the economy grew an annual 25.4 percent, up from 3.1 percent in the first quarter.

    The Central Bank of the Dominican Republic issued the following statement:

"At its monetary policy meeting in November 2021, the Central Bank of the Dominican Republic (CBDR) decided to increase its monetary policy interest rate by 50 basis points, from 3.00 % per annum to 3.50 % per annum. Thus, the rate of the permanent expansion facility (1-day Repos) increases from 3.50 % per annum to 4.00 % per annum and the rate for remunerated deposits (Overnight) from 2.50 % per annum to 3.00 % per annum.

This decision regarding the reference rate is based on a thorough assessment of the COVID-19 impact on global output and higher inflationary pressures of external source. In that order, price dynamics continue to be affected by more-persistent-than-expected supply shocks, associated with higher prices of oil and other raw materials that are important for local production, as well as the increase in global freight costs due to container shortages and other supply chains disruptions.

In particular, the monthly change of the consumer price index (CPI) in October was 0.64 %, while cumulative inflation during the first ten months of 2021 was 6.56 %. On the other hand, core inflation, which excludes the most volatile components from the basket, reached 6.31 % year-on-year in October 2021, reflecting second round effects from higher production costs associated with higher inflationary pressures of external source.

Going forward, the CBDR forecasting system indicates that, in an active monetary policy scenario, year-on-year inflation (last 12-months change), which stood at 7.72 % in October 2021, would converge to the target range of 4 % ± 1 % during the second half of 2022, at a more gradual pace than originally expected.

In this context and given the good pace of the economic recovery and the substantial improvements in the labor market, the Central Bank began in August of this year a gradual plan to normalize its monetary policy. In the first stage, the resources granted during the pandemic have begun to return in an orderly manner, as firms and households are repaying at maturity the loans granted through the different liquidity facilities.

In this second stage, the CBDR decided to increase the monetary policy rate (TPM) by 50 basis points with the purpose of preserving price stability, ensuring that the inflation rate converges within the monetary policy horizon. Likewise, it will continue to evaluate the persistence of exogenous shocks on domestic inflation with the purpose of taking additional monetary measures that may be necessary to maintain economic agents’ inflation expectations anchored.

In the international environment, the economic outlook remains positive, although uncertainty due to the pace of global COVID-19 contagions and supply chains disruptions persist. In this regard, Consensus Forecasts slightly revised downwards the pace of global expansion for 2021 to 5.6% in its November report.

For the United States of America (US), our main trading partner, the most recent Consensus projections point to a 5.5 % growth for 2021, revised downwards due to the uncertainty caused by “bottlenecks” in the production and transportation of goods. Indeed, the US economy expanded by 4.9 % year-on-year in the third quarter, while inflation reached 6.2 % in October, above its 2.0 % target and the highest inflation in the last three decades. In this context, the Federal Reserve began the gradual withdrawal of its monetary stimulus, reducing the pace of monthly asset purchases, while market analysts expect that next year it will begin a process of increasing the federal funds rate, which is currently in the range of 0.0 % and 0.25 % per annum.

On the other hand, the economic activity in the Euro Zone is expected to expand by 5.0% in 2021, according to Consensus, while inflation stands at 4.1%, highlighting the 4.5% price change in Germany, the highest in 28 years. Meanwhile, the European Central Bank has maintained the overnight deposit rate at -0.50 % per annum, while announcing that it has begun to moderate the pace of the emergency program to purchase financial assets due to the pandemic, although it will continue with the rest of the liquidity provision programs and long-term refinancing operations for the private sector.

Growth prospects for Latin America continue to improve, with an estimated expansion of 6.6% in 2021, according to Consensus. On the other hand, most central banks with inflation targeting schemes in the region (Brazil, Chile, Colombia, Mexico, Paraguay, Peru and Uruguay) have increased their benchmark interest rates, in response to higher observed and expected inflation.

Regarding commodities, the price of the West Texas Intermediate Crude Oil (WTI) barrel has risen in recent months, from an average of US$72 in September to an average of US$81 in October and November, due to restrictions in global crude oil production and higher global demand. In this context, specialized agencies revised upwards their oil price projections for 2021, although they foresee a gradual moderation during 2022, as global supply normalizes due to an increase in global production and the use of strategic reserves in several advanced economies.

In the domestic scenario, the recovery of aggregate demand has strengthened, growing at 10.6% year-on-year during September, as measured by the Monthly Economic Activity Indicator. The dynamism of the Dominican economy has allowed the accumulated expansion during the first nine months of the year to reach 12.7%, influenced by the good performance of sectors with high productive linkages such as Construction, Local Manufacturing, Free Trade Zones, Commerce, as well as by the recovery of the Hotels, Bars and Restaurants sector.

In this context of a faster-than-expected economic reactivation, forecasts point to an economic expansion of around 10.7% during 2021. This positive outlook for the Dominican economy is supported by the significant recovery of domestic demand, the important progress in the national vaccination plan, and the gradual improvement of tourism, with an estimated arrival of 5.0 million non-resident visitors in 2021.

Likewise, the implementation of the monetary stimulus since the beginning of the pandemic has been successful, by promoting a greater dynamism of private credit in local currency, which maintained an expansion of around 10 % year-on-year in November. Regarding public finances, it is important to note that in recent months there has been a reactivation of public investment, which is expected to continue in forthcoming quarters and to contribute to the consolidation of the economic recovery.

In the external sector, remittances continued to perform well, growing 34.4 % during January-October 2021 and are expected to exceed US$10 billion by the end of this year, while total exports expanded 23.3 % year-on-year during January-September 2021. International reserves remain at historically high levels, above US$12.5 billion at the end of October, equivalent to 6.3 months of imports and 13.5% of GDP, which exceeds the metrics recommended by the IMF. These factors have contributed to maintaining the relative stability of the exchange rate, reflected in a year-on-year appreciation of approximately 2.8 %.

The Central Bank of the Dominican Republic reaffirms its commitment to conduct monetary policy towards the achievement of its inflation target and the smooth functioning of the financial and payment systems. In this sense, the institution will continue to closely monitor the macroeconomic environment and the evolution of inflationary pressures, with the purpose of adopting the necessary measures against factors that may put at risk price stability."


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