External conditions of high inflation, as a result of the increase in commodity prices, apparently, are the fundamental reasons why the Central Bank of the Dominican Republic has abandoned its lax policy of monetary expansion due to an increase in its interest rate.
This measure, which provides for an increase of 50 basis points in the monetary policy rate (MPR), is the resource of central banks to curb the trend of inflationary processes, which at the same time marks a new cycle in the conditions of internal financing and investment.
Interest rates (active rate and passive rate)
The lending rate is the one paid by the clients of banks and entities of the financial system for their loans and will move upwards. But this occurs in the magnitude of risk of the bank. Many will hold out for a bit and others with higher risk and lower capital will apply the magnitude of the increase.
Similarly, financial intermediation entities pay passive rates for savings and investments. But this is the last one to move.
At the moment, the direct indicator that is the FED (Federal Reserve of the United States) maintains its interest rate until 2022, but some movement is expected in the medium term to contain the overheating of the economy, as a result of the monetary stimuli on consumption .
The BCRD raised the monetary policy interest rate by 50 basis points, from 3.00% annually to 3.50% annually. In this way, the rate of the permanent liquidity expansion facility (1-day Repos) increases from 3.50% per year to 4.00% per year and the rate of remunerated deposits (Overnight) from 2.50% per year to 3.00% per year.
The monetary entity explained in its statement that the BCRD forecasting system indicates that, in an active monetary policy scenario, interannual 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.
According to Miguel Collado Di Franco, Senior Economist for the Regional Center for Sustainable Economic Strategies (CREES), the latest data published by the Central Bank, financial intermediaries maintain high liquidity in this institution. An important element to understand the behavior of the rates.
Maintains that the sign of rising rates is important. But, liquidity is even more important than the benchmark rate in the Dominican Republic in the short term.
In the coming weeks, it will be important to observe if this last variable (liquidity) decreases, since it would indicate a smaller amount of resources to be lent and, consequently, an increase in rates could be evidenced.
In relation to the medium-term trend, rates in the Dominican Republic should be on the rise, as the monetary policy of the main central banks, marked by that of the United States Federal Reserve, begins to give restrictive signals.
We understand that in the coming months, international monetary policy will encourage a gradual reversal of the very lax monetary policy maintained by local authorities since the beginning of the Covid-19 pandemic.