Dominican Central Bank Likely To Raise Rates In Short-To-Medium Term As Growth, Inflation Pick Up

• It is expected that the Banco Central de la República Dominicana (BCRD) will begin to hike interest rates in the coming quarters as economic activity strengthens and inflation remains elevated. The BCRD is expected to modestly raise its benchmark interest rate to 3.25% by end-2021, from the current 3.00%, as the economic recovery gains pace. 
• In 2020, the BCRD cut interest rates by 150 basis points (bps) to 3.00%, a historic low, in an effort to prop up economic activity throughout the COVID-19 pandemic. The BCRD also implemented additional measures to bolster domestic liquidity, extending approximately DOP$215.0Bn (around 5.0%) in liquidity provisions as of its May 2021 meeting. 
• However, elevated inflation will also prompt the Central Bank to begin a rate-hiking cycle.  Inflation is forecast to average 6.4% in 2021, well above the BCRD’s 3.0-5.0% target inflation range. In the year through April, higher transport costs have pushed monthly inflation to average 7.8% y-o-y, from 2020's average of 3.8%.  
• Additionally, higher global energy and food prices, which have had an outsized impact on the Dominican consumer price index basket, could extend this trend in the coming months.  
• However, if price growth significantly decelerates in the coming months and global monetary conditions remain accommodative, the BCRD may delay rate hikes until 2022.

(Source: Fitch Solutions)