Dominican Republic: Central Bank stands pat in July amid ongoing peso weakness
July 31, 2020
At its end-July meeting, the Central Bank (BCRD) left its policy rate unchanged at 3.50% for the fourth straight meeting. However, earlier in July the Bank announced DOP 60 billion (USD 1 billion) in extra liquidity to support businesses and households, taking the total additional liquidity provision since the start of the coronavirus crisis to DOP 190 billion.
The BCRD’s decision to keep rates unchanged despite weak economic conditions was likely based on a desire to stabilize the currency, which is down 12.3% against the USD so far this year amid collapsing tourism and exports. As a result, the Bank instead opted for an extra liquidity injection in a bid to prop up the fragile economy.
In its communiqué, the Bank did not provide explicit guidance on the future direction of interest rates, but stated it would continue to monitor the impact of coronavirus on inflation and economic stability, and was prepared to react if needed. As such, further rate cuts should not be ruled out if the economy remains depressed. That said, a more stable peso could be a necessary condition for easing. Indeed, unlike at the prior meeting, the BCRD cited currency stability as a key objective going forward, highlighting the Bank’s concern.
Author: Oliver Reynolds, Economist