Monetary Policy Rate increase

DOMINICAN REPUBLIC - In Brief 09 Apr 2017 by Pavel Isa

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A few days ago the Central Bank announced an increase of 25 basis points in its Monetary Policy Rate (MPR), from 5.50% to 5.75%. Likewise, it increased the rate for short-term deposits from 4.00% to 4.25% and that of repos from 7.00% to 7.25%. Although the increase was small, this is the second increase in six months, a period in which the accumulated increase was 75 basis points. Although no details are given in the Central Bank press note, in our opinion, monetary authorities are reacting mainly to the pressures on the exchange rate. But rather than taking a bold policy measure, they are "showing their ammo" and indicating that they are willing to defend the exchange rate. The context is wide spread complaints about rationing, mostly by banks, affecting medium and small demanders of foreign exchange, a significant increase in the sale of int’l reserves by the Central Bank, and the perception that operations through non-regulated agents have increased significantly. The diagnosis is clear: the policy of "persuasion" of the Central Bank vis-a-vis commercial banks (main trading agents) through which "suggests" the sale prices of the currency, is in crisis. With the sale of reserve and the increase in the MPR, it aims to calm the tension, but it will only be a short-term remedy. Authorities should accept a rate of devaluation greater than desirable by them. Otherwise, rationing, growth of unregulated operations and sudden increases in the exchange rate (recorded by regulated agents) will persist.