Monday, October 2, 2017

Dominican Rep. holds rate, domestic demand revitalizing

     The Dominican Republic's central bank left its monetary policy rate at 5.25 percent, saying economic activity had reacted favorably to the easing of monetary policy in July with credit to the private sector up by 16 billion Dominican peso since then, resulting in a positive outlook for a revitalization of domestic demand for the rest of 2017.
     The Central Bank of the Dominican Republic (BCRD) cut its rate by 50 basis points on July 31 and lowered the legal reserve ratio by 2.2 percentage points to boost economic growth.
     "In this regard, growth is expected to approach its potential for the end of the year, even in a context of recovering from damages caused by recent climate events," BCRD.
      Hurricane Maria, which caused major damage to Puerto Rico and other parts of the Caribbean, also caused damage to parts of the Dominican Republic last month.
      The World Bank has approved a US$150 million loan to the Dominican Republic to help deal with natural disasters and this should support economic activity in the fourth quarter of this year.
      In addition, public spending is also receiving a boost although the government has said it would still meet the budget's deficit target of 2.3 percent of Gross Domestic Product.
      A dynamic external sector is currently helping boost the country's foreign exchange earnings and helping stabilize the foreign exchange market and thus supporting accumulation of foreign reserves, the BCDR said.
      Inflation in the Dominican Republic rose to 3.18 percent in August from 2.54 percent in July, within the central bank's target range of 4.0 percent, plus/minus 1 percentage points, and the central bank forecasts it will remain within the target range at the end of this year.
      GDP expanded by 5.2 percent year-on-year in the first quarter of this year, down from 5.9 percent in the previous quarter while the exchange rate of the peso has continued its steady depreciation.
       Last month the central bank said the economy grew by an annual 4.0 percent in the first half as domestic demand slowed during the second quarter.
      The Dominican peso was trading at 47.7 to the U.S. dollar today,  down 3.2 percent this year.

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

"At its monetary policy meeting of September 2017, the Central Bank of the Dominican Republic (BCDR) decided to keep its monetary policy interest rate at 5.25% per annum.
The decision on the benchmark rate was taken following a comprehensive review of the balance of risks around inflation projections, including the evolution of the main domestic and international macroeconomic indicators, the relevant international environment for the Dominican economy and expectations of the domestic market. The monthly inflation rate in August amounted to 0.57%, so the year-to-date inflation stood at 1.77%. Also, year-on-year inflation climbed to 3.18%, within the target range of 4.0% ± 1.0% of the Monetary Program. In addition, core inflation, reflecting monetary conditions, rose to 2.27% year-on-year. Projections indicate that inflation would remain within the target range at the end of the year.
In the external context, advanced economies have accelerated their growth for the sixth consecutive quarter. Prospects are favorable for the United States of America (USA), the Eurozone (EZ) and Japan. According to Consensus Forecast, the US would grow 2.2% in 2017, after upwardly revised the annualized quarter-on-quarter growth of April-June to 3.1. By 2018, the USA is projected to grow by 2.4%, in a context of normalization of its monetary policy. As for the EZ, output is expected to expand by 2.1% during 2017 and 1.8% by 2018. The dynamism of the advanced economies would have a positive impact on world economic activity, which would grow 3.0% in 2017 and 3.1% in 2018. It should be noted that inflationary pressures in developed economies remain relatively low, projecting 2.0% for the USA in 2017 and 1.9% in 2018, as well as inflation rates of 1.5% in 2017 and 1.3% in 2018 for the EZ.
On the other hand, Latin America (LA) continues to see a gradual economic recovery, with the exception of Venezuela. In the case of Brazil, the largest economy in the region, it would grow 0.7% in 2017 and 2.3% in 2018. Mexico would expand 2.2% in both years, while Chile would grow 1.4% in 2017 and 2.9% in 2018. The projections for Latin America have been revised upwards and reflect that the region's economy would expand by 1.7% in 2017 and 2.6% in 2018, driven by more favorable terms of trade.
Domestically, economic activity has reacted favorably following the expansionary measures taken at the end of July, such as the reduction of the monetary policy rate by 50 basis points and the decrease in the legal reserve requirement by 2.2 percentage points. It should be noted that credit to the private sector in local currency has increased by RD$16 billion since these measures were taken, so there is a positive outlook on the revitalization of domestic demand for the rest of 2017. In this regard, growth is expected to approach its potential for the end of the year, even in a context of recovering from damages caused by recent climate events. It is important to note that the World Bank approved a US$150 million loan for the Dominican Republic with the purpose of dealing with natural disasters, which would facilitate the recovery of economic activity during the last quarter of the year.
In the fiscal sector, a boost in public spending was recently announced, which implies a more active fiscal policy for the rest of the year. Notwithstanding this decision, the Government announced that it would meet the deficit target of 2.3% of GDP, set in the National Budget for 2017. On the other hand, the external sector maintains its dynamism, contributing to the increase in foreign exchange earnings and creating a favorable environment for the relative stability of the exchange market and for the accumulation of international reserves.
The Central Bank of the Dominican Republic reaffirms its commitment to conduct monetary policy to achieve its inflation target and maintain macroeconomic stability. In this regard, it will continue to monitor the evolution of the world economy and the domestic situation in order to take the necessary measures in view of possible risks to price stability and the proper functioning of the financial and payment systems."


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