Falling Inflation In The Dominican Republic To Allow For Rate Cuts In Q3 2023

• In its last policy meeting on February 28, the Banco Central de la Republica Dominicana (BCRD) decided to continue holding rates at 8.50%, in line with Fitch’s expectations.
• The central bank’s monetary board cited the broad decline in international prices for commodities like oil and food, as well as primary materials necessary for manufacturing. This easing price growth has been underpinned by government subsidies for gasoline, utilities, and food items, as well as slowing household consumption.
• Additionally, both headline and core inflation have shown a sustained decline since Q3 2022 towards the central bank’s inflation target range of 4.0% (+/- 1.0%). Despite pausing at a time when markets were pricing in a much more aggressive path for interest rates in developed markets, the Dominican peso has held up reasonably well.
• Therefore, Fitch expects that headline inflation will fall from an average of 8.8% y-o-y in 2022 to 5.6% in 2023, descending to 4.9% in 2024; and will give the BCRD scope to remain in pause mode.
• Looking forward, the central bank will likely start cutting rates in Q3 2023, setting the foundation for Fitch’s interest rate forecast of 7.50% by end-2023. However, the DR’s economy will see 3.8% GDP growth in 2023, far below the pre-pandemic average of 6.1% between 2015 and 2019, signalling that the previous elevated inflation rates have had the intended effect on domestic demand.

(Source: Fitch Solutions)