The Central Bank (BCRD) raised its interest rate again, now to 7.75% per yearthus adopting a restrictive measure and following in the footsteps of the United States Federal Reserve (FED) and the banks of other nations of the world, but How far does this provision reach the debtor population in the national financial system?
The new rise of the interest rates in the BCRD will be felt on the loans (active rates) of ordinary people and companies, specifically in the new ones and the old ones that were not negotiated at a fixed rate; as well as in the passive rate, which is the result of the return on deposits, whether in savings accounts, current accounts or securities invested by local and foreign agents in the DR.
The measure that rises from 7.25% 7.75% annually the BCRD’s Monetary Policy Rate will also affect other activities, especially those of commerce and consumption (personal loans) and new mortgages, with the aim of slowing down the economy, that is, helping to lower the demand for money and thus avoid an overheating of the economy that would have a greater impact on prices, at a time when inflation has subsided slightly.
The increases ofLending rates directly affect debtorswhile the active favors the owner of the money and the intermediary, with which the most affected is the majority who seek financing to buy a house, car or other asset.
The new restrictive policy of the BCRD could be maintained until the middle of next year 2023 due to the uncertainty of the international market due to the Russian war in Ukraine.
The BCRD announced that at its monetary policy meeting in July 2022 it decided to increase its monetary policy interest rate by 50 basis points from 7.25% to 7.75% per year. In this way, the rate of the permanent liquidity expansion facility (1-day Repos) went from 7.75% to 8.25% per year and the interest-bearing deposit rate (Overnight), from 6.75% to 7.25% per year.
From the end of 2021 the BCRD has applied a process of monetary normalization through increases in its monetary policy rate and reduction of the excess liquidity of the system financial, with the aim of counteracting inflationary pressures, avoiding risks of overheating of the economy, as well as a deterioration of the differential with respect to external interest rates, says the entity in a statement.
The Latin American countries that have raised their reference rates since 2021 to face high levels of inflation, the BCRD cites Argentina (2,200 basis points), Brazil (1,125 basis points), Chile (925 basis points), Paraguay (725 basis points), Colombia (725 basis points), Costa Rica (675 basis points), Peru (575 basis points), Uruguay (525 basis points), Mexico (350 basis points), Nicaragua (150 basis points), and Guatemala (50 basis points).
Piantini explains he will feel in 2023
For the economist Luis Manuel Piantini, the increase in monetary policy interest rates has a lag of two and three quarters to be felt its contractionary effects, so its greatest impact will be felt next year with a drop in the growth rate of the private economy given the aggressive policy of contraction of the monetary mass that the accelerated monetary authorities have been executing in the last two quarters.
“It is therefore that next year the Government should assume a strong policy of expanding public investment spending to offset the drop in private spending and avoid a sharp drop in the growth rate, which should hover around a level above 3% by the end of the year given the slowdown in the economies of developed countries with its negative consequences on employment, increasing the loss of employment and therefore the unemployment rates”, he explained.
He argues that that behavior will affect tourism and remittances in particular. This global slowdown will cause a drop in global demand and, therefore, in the consumption of raw materials, reducing their prices, which will be reflected in a decrease in inflation rates, which is why some economists predict that the Federal Reserve will begin to reverse its current contractionary policy by cutting the interest rates of its monetary policy as of the second half of next year, expectations that are being reflected in the upward behavior of the stock markets.
Assume that To compensate for the possible negative impact on national and foreign investment, the Government should deepen the economic opening of the country, declaring it a free trade and production zone, promoting a boost in attracting investors who leave the Asian continent and are taking possession of countries in the Western Hemisphere near their sales markets. Also with this declaration, all companies would be equal in tax treatment in the national territory, unifying the formal and informal markets.
Thus the authorities would maximize the advantages that free zones and tourism have been showing being the most dynamic sectors because they have fewer government restrictions, and it would be the characteristic stamp that this gubernatorial period would leave on the nation, and with said expansions the tax base in personal and consumption taxes will also grow, to compensate for the gradual elimination of tax on benefits to nationals.
These corporate profit taxes would only apply to those that distribute dividends or transfer their profits abroad. The favorable impact would be a magnet for attracting investments to the country who want to locate in the region with a significant increase in the expansion and specialization of national employment
The Dominican Republic continues to show strong dynamism in the expansion of its economy, driven by good growth in exports of goods and services and by private credit, he says.
He affirms that a 5% appreciation in the peso exchange rate has taken pressure off the domestic inflation rate.
Additionally, the Government’s measures to help families by subsidizing increases in energy prices and goods in the family basket through sales programs to counteract the adverse effects of the explosive growth of food raw materials in international markets have allowed that there is no more pronounced contraction in private consumption, giving breathing room to the economy to continue expanding.
Anyway Falls in the growth rates of developed economies will be reflected in falls in the growth rates of our external sales of goods and services and in remittances received which may subtract from the growth momentum during the second half of the year, although domestic spending accelerates seasonally during that period, ending up at a rate between 4.5% and 5% of GDP, one of the highest in the Western Hemisphere .
Indicators
Contrary to what is happening in the international economic panorama where the developed economies and China have experienced significant falls in their growth rates, in the United States with two negative quarterly falls, which for some economists would already be entering a recessionary process and for others in one of growth rates lower than its potential, the The Dominican Republic continues to show strong dynamism in the expansion of its economy, driven by good growth of exports of goods and services and by private credit.
The measures taken by the Government to help families by subsidizing increases in energy prices and goods in the family basket through sales programs to counteract the adverse effects of the explosive growth of food raw materials in international markets, have allowed a more pronounced contraction in private consumption not to take place, giving breathing room to the economy to continue expanding.
In any case, the falls in the growth rates of the developed economies will be reflected in falls in the growth rates of our external sales of goods and services and in the remittances received, which may subtract from the growth momentum during the second half of the year. year, although domestic spending accelerates seasonally during that period, ending up at a rate between 4.5 and 5% of GDP, one of the highest in the Western Hemisphere.
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Domestic inflation
The monthly variation of the consumer price index (CPI) stood at 0.64% during June 2022, while year-on-year inflation, that is, in the last 12 months, stood at 9.48%, moderating with respect to its highest level reached in 2022 from 9.64% in April. Similarly, year-on-year core inflation, which excludes the most volatile components of the basket, is beginning to show signs of moderation, going from 7.25% in May to 7.11% in June.