Dominican Republic: Inflation falls in May, Central Bank cuts rates and announces fresh liquidity injection
June 28, 2019
Consumer prices fell 0.03% in May over the prior month, contrasting April’s 0.53% increase. According to the Central Bank, May’s decline was largely on the back of lower prices for housing, transport, and recreation and culture.
Inflation fell from 1.6% in April to 1.3% in May, remaining below the Central Bank’s inflation target range of 3.0%-5.0% for the seventh straight month. Core inflation—which excludes volatile items such as certain types of food, fuel and administered prices—dipped from 2.1% to 2.0%. Cooling economic momentum so far this year has likely played a role in keeping inflation muted.
At its 28 June monetary policy meeting, the Central Bank (BCRD) cut the policy rate from 5.50% to 5.00%. Moreover, around the same time the Bank announced a further DOP 5 billion liquidity injection to boost construction lending, on top of the DOP 29 billion already announced in May. The Bank’s decision to loosen its stance follows stubbornly low inflation in recent months, an economic deceleration so far this year—which has put the Bank’s 2019 growth forecast of 5.5% at risk—and the Federal Reserve’s shift to a more dovish stance, which has given the BCRD more leeway to cut. However, while the BCRD judged that inflation would remain below 3% until end-2019, it reiterated its expectation that inflation will rise back to the center of the target range in 2020.
In its communiqué, the Bank maintained its dovish stance, once more highlighting it would be alert to “moderating global economic activity and international uncertainty, and the possible impact on domestic demand”. This suggests further rate cuts shouldn’t be ruled out in coming months.
Author: Oliver Reynolds, Economist