Dominican Republic: More Rate Cuts on the Horizon

• After restarting its rate-cutting cycle in August with a 25 basis point reduction to 7.50%, Fitch Solutions expect that the Banco Central de la República Dominicana (BCRD) will proceed cautiously, cutting to 6.75% by end-2023 and 5.00% by end-2024.
• According to the post-meeting minutes, the previous month’s pause was due to improving economic outlooks for the US and Latin America and the US Federal Reserve’s 25 basis point hike earlier that month. For the August meeting, the central bank’s monetary board cited the broad decline in international prices for commodities like oil and food, as well as materials for manufacturing. 
• Additionally, both headline and core inflation have shown a sustained decline since Q322 towards the central bank’s inflation target range of 4.0% (+/- 1.0%), although headline inflation ticked up slightly from 3.9% in July to 4.3% in August.
• Given this, Fitch expects to see a bit of reflation later in the year and 2024 due to currency depreciation and rising commodity prices, which underpins its forecast of 4.5% y-o-y inflation by end-2023 and 4.4% average in 2024.
• Risks to Fitch’s interest rate forecast are balanced as stronger US and DR economies could prompt the BCRD to temper policy loosening, while a deeper US recession in 2024 could pose headwinds for the DR economy, pressuring the bank to cut rates to stimulate growth.

(Source: Fitch Solutions)