Peso strengthens, amid solid growth, persistent inflation and tighter financial conditions
Economic activity remained resilient in July, expanding by 4.6% y/y and bringing cumulative January-July growth to 4.5%. But the policy environment has shifted considerably since 2025. Headline inflation eased to 5.47% in July, but remained above the Central Bank's target range, while core inflation held at 4.96%. Monetary and financial conditions have consequently grown less accommodative, despite an unchanged 5.25% policy rate: peso liquidity growth has slowed, market rates are still above their early-2026 levels and peso-denominated credit has lost momentum. Powerful peso appreciation provides an additional disinflationary channel.
External conditions continue favorable overall, but have grown less supportive since Q1 2026. The current account shifted from a $912 million surplus in Q1 to a $301 million deficit in Q2, as higher imports widened the merchandise trade deficit. Still, strong exports, tourism receipts, remittances and FDI left the current account in surplus for H1. The simultaneous appreciation of the peso and decline in international reserves doesn’t appear to reflect foreign exchange intervention; government external payments and financial sector balance sheet adjustments provide an important part of the explanation.
The 2026 budget amendment raises the projected fiscal deficit only slightly, from 3.2% to 3.3% of GDP, with most additional spending directed toward electricity and fuel subsidies. Capital expenditure execution nevertheless continues to lag. With growth still solid but inflation elevated, and monetary conditions less supportive, the central question for H2 is whether economic activity can sustain the pace required to achieve full-year growth of around 4%.
The economic outlook is unfolding alongside a more complex political and external policy environment. The August 16th cabinet reshuffle brought strategically relevant appointments in foreign affairs and banking supervision, while trade relations with the United States have moved to the forefront, following the imposition of the additional 12.5% tariff on a significant share of Dominican exports. The government has made a reciprocal trade agreement with the United States a priority -- an issue made more pressing by peso appreciation, and its effect on export competitiveness.
Now read on...
Register to sample a report