Wednesday, September 2, 2020

Dominican Rep. cuts rate 2nd time, inflation transitory

     The central bank the Dominican Republic lowered its benchmark interest rate for the second time this year, saying the recent rise in inflation is transitory and the latest rate cut and an easing of criteria for applying for liquidity should contribute to sustain credit and provide relief to companies and households.
     The Central Bank of the Dominican Republic (BCRD) cut its monetary policy interest rate by another 50 basis points to 3.0 percent and has now cut it 150 points this year following a cut in March.
     Since July 2019, when the central bank began the easing cycle, the rate has been cut five times by a total of 250 basis points.
     BCRD also narrowed its interest rate corridor by lowering the rate on its one-day repos by 100 basis points to 3.50 percent while the interest rate on overnight deposits is unchanged at 2.50 percent so the corridor on the bank's permanent liquidity facility has a range of plus/minus 50 points around the monetary policy rate.
     Inflation in the Dominican Republic jumped to 4.35 percent in July from 2.9 percent in June and 0.99 percent in May while core inflation, which reflects monetary conditions, rose to 4.14 percent from 3.5 percent in June, BCRD said in a statement on Aug. 31.
     But BCRD said inflation is still within its target range of 4.0 percent, plus/minus 1 percentage point, and forecasts and the expectations of economic agents indicate the recent inflationary pressures are of a transitory nature.
     The latest monthly index of economic activity IMEA shows the economy is in a partial recovery after bottoming in April with a fall of 29.8 percent and then declining 7.1 percent in June and 13.6 percent in May.
     Preliminary projection also show economic growth in July will be around the accumulated decline of 8.5 percent in the first half of the year and going forward the economy is seen gradually recovering during the rest of the year and approach its potential growth in 2021 once the health and economic crises from COVID-19 has been overcome.
     The gross domestic product of the Dominican Republic contracted 6.5 percent in the first quarter from the previous quarter for zero annual growth.
     BCRD added it was continuing to implement measures to mitigate the impact of the coronavirus and had made 120 billion pesos to financial institutions in a first phase and another 70 billion in a second phase  by increase the availability fo short-term repos by 10 billion and creating a rapid liquidity facility worth 60 billion at an interest rate of 3.0 percent.
     As a result of these measures, financial conditions have remained favorable, with lower interest rates on loans granted by banks while private credit in local currency has risen 10 percent annually by the end of August, a decline with respect to earlier months.
    After depreciating sharply in late May through most of June, the peso has stabilized since July and risen slightly this month to trade at 58.4 to the U.S. dollar today, down almost 9 percent this year.



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