This article originally appeared on CentralBankNews.info on July 26, 2018. It is reproduced here with permission from the author.
The Central Bank of the Dominican Republic (BCRD) raised its monetary policy rate by 25 basis points to 5.50 percent and said it would continue to withdraw the monetary stimulus from last year as long as economic growth continues to generate inflationary pressure.
It is the first rate hike by the BCRD since April 2017 and the first change in rates since August last year when the rate was slashed by 50 basis points.
In addition to raising the monetary policy interest rate, the central bank raised the deposit rate by 25 basis points to 4.0 percent and the rate on its permanent expansion facilities (repos) by the same amount to 7.0 percent.
BCRD said it changed its monetary policy to achieve its inflation goal as inflation was forecast to gradually rise due to higher oil prices, pressure from domestic demand and increased uncertainty in international financial markets.
In a statement from July 24, the BCRD noted that cumulative inflation in the first six months of this year was 1.43 percent so the annual inflation rate in June had risen to 4.63 percent, above the bank’s midpoint target range of 4.0 percent, plus/minus 1 percentage point.
Inflation in the Dominican Republic has risen steadily since 3.32 percent in February and June inflation was the highest rate since October 2013.
As the United States continues to normalize its monetary policy, BCRD said international financial conditions are becoming less favorable and this has increased risk premiums and long-term interest rates for emerging economies.
“The higher interest rates in the US have also generated an appreciating trend in the dollar, which together with higher oil prices, has contributed to an increase in the depreciation of the currencies of developing countries,” BCRD said.
The Dominican peso has been relatively stable since March, in contrast to a steady depreciation against the U.S. dollar in the last decade.
The peso was trading at 49.76 to the U.S. dollar today, down 4 percent this year.
However, despite the changing international financial conditions, BRCR said the economy in emerging countries remains in a positive trend and in Latin America, with the exception of Venezuela, there would be positive growth of 2.0 percent this year despite the moderation seen in such large economies as Argentina and Brazil.
Domestically, the economy is also continuing to evolve in a favorable manner, with the monthly indicator of economic activity (IMAE) showing cumulative growth of 6.6 percent in the first five months of the year. The trend cycle rose by an annual 6.9 percent in May, showing that the economy would continue to grow above potential in the rest of this year.
“To the extent that this growth path is maintained and generates pressures on future domestic prices, monetary policy would continue to move towards the withdrawal of the monetary stimulus launched last year,” BCRD said, adding “in this way, important deviations in the differential between domestic interest rates and those of the US would be avoided.”