Central Bank cuts rates as inflation falls into target range, and growth slows

DOMINICAN REPUBLIC - Report 12 Jun 2023 by Magdalena Lizardo

May offered many surprises. Monthly inflation was negative (-0.2%), which allowed interannual inflation, at 4.43%, to fall into the target range of 4 ± 1% per year. But the cost has been high: economic activity growth was just 1.2% y/y in January-April.

The Central Bank's response was immediate: on May 31st it cut the monetary policy rate from 8.5% to 8%, and announced additional measures to increase liquidity by DOP 94 billion, to finance the productive sectors and households.

The Bank’s response was in line with the IMF’s May 19th recommendations at the end of its Article IV review mission: “The monetary policy should remain data dependent and calibrated to ensure that inflation converges fully to its target over the policy horizon.” Other IMF recommendations seem fall at on at least partially fertile ground, since the government proceeded to propose to Congress a fiscal responsibility bill to limit the growth of primary spending, which aimed for a target debt/GDP ratio of 40% in 2035.

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