The rise from 3.00 to 3.50 in the reference interest rate should affect an increase in the cost of money
The Central Bank of the Dominican Republic (BCRD) turned its monetary policy to a more rigid and restrictive position, after maintaining it for 14 months anchored at the 3.0% annual level, with the express purpose of promoting economic recovery through a higher demand for credit.
With the new inclination given by the BCRD to one of its main monetary policy instruments, the rate returns to the level it had until August 31, 2020. The rebound in economic growth has been achieved, with its aftermath of impact on the general level of prices, now the mission sought by monetary policy is to dismantle the inflationary effect of monetary incentives and bring the Consumer Price Index to the goal set in the monetary program of 4% ± 1%, a goal now deferred for the second semester of the year. next year 2022.
The new rate, set one week in advance, due to the fact that the monthly monetary policy meetings are held regularly on the 30th of each month, rises 50 points to the interest rate that serves as a reference to the financial system of the levels by The ones that should range from the cost of money. The proposed increase is 16.66% over the current rate that ends next Tuesday.
When the BCRD set the rates that will be in force as of next December, the economic scenario was one of greater uncertainty than what the international context now paints. He argued at that time that in the international environment prevailed “high uncertainty, associated with the pace of global economic recovery and the fact that the number of new infections worldwide still” remained high.
For the restrictive decision of now, the governing body of monetary policy is based on an exhaustive evaluation of the impact of covid-19 on production worldwide and the greater inflationary pressures of external origin. “In that order” he states, “price dynamics continue to be affected by more persistent supply shocks than expected, associated with higher prices of oil and other important raw materials for local production, as well as higher costs. global freight rates due to the shortage of containers and other distortions in supply chains ”.
It is expected that from next December, interest rates will show a slight rebound, both the asset rate, which is charged by financial institutions for the loans they grant, and the liability rate, which represents the payment to depositors.
December is the month in which the largest circulation of money occurs in the Dominican economy, due to the payment of salary 13 in the public sector, which pays out about RD $ 20,000 million as of day 4, and the private sector, with an amount approximate of RD $ 37,000 million. Banks have one of the periods of greatest demand for credit in the last month of the year, and commerce has one of its best sales periods. Had the flexible or cheap money reference conditions been maintained, this dynamic would have been combined with the ample circulation of money and created a scenario of greater inflationary potential for the end of the year.
The “signal” sent to the market by the Central Bank, with a 50 basis point increase in the reference interest rate, anticipates a possible inflationary impact originated in the expansionary monetary policy applied from September 1, 2020 to December 1, 2021.
On Wednesday at its monetary policy meeting in November 2021, the BCRD decided to increase its monetary policy interest rate by 50 basis points, from 3.00% per annum to 3.50% per annum, and thus the rate of the permanent facility. liquidity expansion (1-day Repos) increases from 3.50% per annum to 4.00% per annum and the rate of remunerated deposits (Overnight) from 2.50% per annum to 3.00% per annum.
The BCRD explained that this decision regarding the reference rate was based on an exhaustive evaluation of the impact of COVID-19 on production worldwide and the higher inflationary pressures of external origin.
He emphasized that “the dynamics of prices continues to be affected by more persistent supply shocks than expected, associated with higher prices of oil and other important raw materials for local production, as well as the increase in global freight costs due to the container shortages and other distortions in supply chains ”.
He cited that in particular, the monthly variation of the consumer price index (CPI) in October was 0.64%, while the accumulated inflation during the first ten months of 2021 was 6.56%. “On the other hand, core inflation, which excludes the most volatile components of the basket, reached 6.31% year-on-year in October 2021, reflecting second-round effects due to higher production costs associated with higher inflationary pressures of external origin”, precise.
The resources provided are returning
The analysis that supports the decision to increase the rate states that “going forward, the BCRD forecasting system indicates that, in an active monetary policy scenario, year-on-year inflation (variation of the last 12 months), 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 planned.
In this context, considering the good rhythm 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, to the extent that companies and households are repaying the loans granted through the different liquidity facilities upon maturity “