BCRD reduces its monetary policy rate by 50 basis points

Santo Domingo, Dominican Republic . At its monetary policy meeting in August 2020, the Central Bank of the Dominican Republic (BCRD) reduced its monetary policy interest rate by 50 basis points, from 3.50% to 3.00% annually.

The global economic downturn and the fact that the number of new infections worldwide remains high are contributing factors. Indeed, Consensus Forecasts (CFC) projects a 4.7% contraction in the global economy for 2020, similar to the IMF's most recent estimate of a 4.9% decline. In response to this weakening of global activity, central banks around the world continue to reduce their policy interest rates and expand monetary easing measures to support domestic demand in their countries.

For the United States of America (USA), our main trading partner, Consensus estimates that economic activity will contract this year, going from an expansion of 2.2% in 2019 to a decrease of -5.2% in 2020. In this context, the Federal Reserve continues to apply a set of expansionary monetary measures, with its monetary policy rate (federal funds rate) expected to remain in the range of 0% to 0.25% until 2022, while implementing quantitative easing programs based on the provision of liquidity through repos, purchases of public and private securities in the secondary market, and credit channeling programs for micro, small, and medium-sized enterprises, mainly in the health and education sectors. Additionally, Federal Reserve Chairman Jerome Powell announced changes to monetary policy objectives, giving greater priority to job creation and allowing inflation to remain above target in the medium term to compensate for the prolonged periods of low inflation that occurred prior to the pandemic.

The expectations of economic agents indicate that recent inflationary pressures are transitory in nature

Regarding the Eurozone, the pandemic is projected to cause an even greater contraction in this bloc of countries, with growth falling from 1.3% in 2019 to a decline of -7.9% in 2020, according to Consensus . In response to this challenging outlook, the European Central Bank (ECB) is maintaining its overnight deposit rate at -0.50% annually, while implementing a broad liquidity provision program through the purchase of public and private securities in the secondary market. It has also eased the conditions of its private credit channeling program through financial institutions and reduced the interest rate for loans to SMEs and households channeled through these facilities. Similarly, the Bank of England has continued to implement monetary stimulus measures and liquidity provision programs, and has announced that it is evaluating further reductions in its policy rate, which could push the benchmark rate into negative territory.

In Latin America, the economic outlook has been significantly affected. Given this scenario, a reduction of -8.0% in regional growth is estimated for 2020, according to Consensus . In this context of a marked economic slowdown, Latin American central banks have continued to significantly lower their monetary policy rates, with notable reductions this year in Mexico (275 basis points), Brazil (250 basis points), Colombia (225 basis points), Peru (200 basis points), Costa Rica (200 basis points), Honduras (175 basis points), and Chile (125 basis points), among others. Additionally, the region's central banks continue to implement widespread monetary stimulus packages through liquidity provision programs and the channeling of credit to the private sector.

In relation to raw materials, the price of Texas intermediate oil (WTI), used as a reference for budgetary purposes, has stabilized around US$40 per barrel, projecting an average price for 2020 around US$ 38.5 dollars per barrel, below the value of about US$ 60 per barrel initially planned in the National Budget. On the other hand, the price of gold continues to increase, reaching historical levels above US$1,900 per troy ounce as it is used as a refuge of value in a context of high uncertainty in international markets. In this sense, the behavior observed during this year in the prices of primary goods should benefit the terms of trade of the Dominican Republic and contribute to the balance of payments, through a lower oil bill and the increase in the value of the gold exports.

In the domestic environment, the Monthly Economic Activity Index (IMAE) indicates that, after hitting bottom in April with a fall of 29.8%, the economy is in a partial recovery process, registering variations of -13.6% in May and -7.1% in June. Likewise, preliminary projections indicate that economic growth during the month of July would be around the accumulated variation during the first semester of -8.5%. Going forward, forecast models predict that the economy would gradually recover during the rest of the year and would approach its potential growth in 2021, once the health and economic crises derived from COVID-19 have been overcome.

In this context, the Central Bank continues to implement a set of monetary measures aimed at mitigating the effects of the coronavirus, through an increase in financing for the productive sectors and households. In particular, of the total RD$120 billion made available to intermediation entities in the first phase, about RD$100 billion have been channeled through the different facilities. In a second stage, an additional RD$70 billion is being made available to economic agents, through an increase by RD$10,000 million in the availability of short-term Repos and the creation of the Rapid Liquidity Facility (FLR). ) for RD$60 billion at an interest rate of 3.0% for financial intermediation entities, with the purpose of supporting the channeling of resources towards key productive sectors, particularly the health and education sectors, and to provide financial relief to households and MSMEs.

As a result of the monetary measures, financial conditions have remained favorable, registering a reduction in the interest rates on loans granted by commercial banks. On the other hand, private credit in national currency expands at an interannual rate close to 10% at the end of August, observing a moderation with respect to the pace of expansion observed in recent months.

In this sense, the new reduction in the monetary policy rate (which would bring the decrease in the reference rate to 150 basis points since the beginning of the pandemic) and the recently announced relaxation of the application criteria of the Rapid Liquidity Facility, They should contribute to sustaining credit dynamism and providing financial relief to companies and households. The implementation of the broad monetary stimulus package will continue to support the gradual recovery of economic sectors, facilitate the preservation and generation of jobs and allow the convergence of growth towards its potential on the policy horizon.

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