Dominican Rep: Backtracking in Monetary Policy after DOP Depreciation Accelerated

DOMINICAN REPUBLIC - In Brief 04 Sep 2013 by Pavel Isa

Last week, the Central Bank announced several measures aimed at containing the depreciation of the DOP. In August DOP depreciated 1.8% against the USD, the highest monthly rate registered so far in 2013.The measures included:1. The increase of the monetary policy rate in 200 bp (from 4.25% to 6.25%).2. Allocated DOP 2.86 billion in Central Bank fixed income notes, twice as much as the amount originally offered.3.  Sales of international reserves in order to force a reduction either in the exchange rate or in the rate of depreciation.The measures are of concern because of its consequences on aggregate demand and economic activity. As a result, in 2013 actual growth will be lower than the forecasted (3%). For the rest of the year, we expect a reduction in consumption, production and employment. The decision backtracked on the expansionary monetary policy inaugurated last year and reinforced just less than three months ago with a reduction in the monetary policy rate. The policy was aimed at stimulating economic activity after the release of deceiving numbers of GDP growth for Q1.Although there is a consensus that a policy reaction to the August devaluation rate was needed, many observers consider that monetary authorities went well beyond what it would be needed in order to contain depreciation and to avoid instability. Immediate results of the measures are a reduction in the market exchange rate during the first days of this week, and an increase in interest rates for September.

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