Dominican Republic: Central Bank raises rates in December
At its end-December meeting, the Central Bank of the Dominican Republic (BCRD) decided to raise the policy rate by 100 basis points to 4.50%. This followed November’s 50 basis-point hike, and the Bank’s commitment made in August to unwind the extraordinary liquidity-boosting loan facilities that were introduced in response to the pandemic.
The decision was driven by rising inflation, which moved further above the Bank’s 3.0%–5.0% target range in November. The Bank judged that a rate rise was necessary for inflation to converge to its target band within the medium-run and to ensure agents’ inflation expectations remained anchored. Moreover, remarkable growth figures last year—with the economy expected to have grown by more than 10.0% and beaten pre-pandemic output—indicate the potential for overheating, further encouraging the Bank to rein in its support to demand. In addition, a number of major neighboring central banks have significantly raised rates in recent months, while the U.S. Federal Reserve’s increasing hawkishness added further impetus for a rate hike.
In its communiqué, the BCRD did not provide explicit direction on future interest rate movements. That said, with the economy continuing to grow quickly and ongoing supply bottlenecks that are “more-permanent-than-expected” according to the Bank, further tightening is possible this year.
On the outlook for monetary policy, analysts at JPMorgan commented:
“Headline inflation is likely to cool as energy prices become less of a source of pressure, but core inflation is likely to remain under pressure in coming months. This largely underpins our call for further rapid rate increases ahead. In fact, we now see the terminal rate by end-2022 at 7.0%.”