Dominican Republic: Inflation picks up in June, Central Bank hikes rates
July 10, 2018
Consumer prices rose 0.21% in June over the previous month, down from May’s 0.26% rise. According to the Central Bank, June’s figure was driven by higher prices for food and non-alcoholic beverages; and transport.
Inflation ticked up from 4.5% in May to 4.6% in June, above the midpoint of the Central Bank’s inflation target range of 3.0%–5.0%. Core inflation, which excludes volatile items such as certain types of food, fuel and administered prices, remained at 2.7%.
At its 24 July monetary policy meeting, the Central Bank raised its main policy rate from 5.25% to 5.50%, the first policy change since rates were cut in July 2017. The Bank’s decision came as headline inflation has moved towards the upper bound of the Bank’s target range in recent months. Moreover, higher international oil prices and continuing above-potential growth will likely generate price pressures in the quarters ahead.
Earlier in July, the Central Bank announced it will intervene in the foreign exchange market amid strong dollar demand fueled by a booming domestic economy, a tighter monetary stance by the Federal Reserve and a higher oil import bill. Taken together with the increase in interest rates, this move is designed to support the peso and international reserves, which have dipped markedly in recent months. A recent USD 1.3 bn bond sale should give reserves a temporary short-term boost going forward.
The Central Bank adopted a hawkish tone in its recent communiqué, stating it was prepared to keep hiking rates if necessary in the coming months to ensure economic stability and on-target inflation.
Author: Javier Colato, Economist