"The stability of the currency market is not negotiable and we have a commitment to maintain an orderly and stable exchange market," said Valdez Albizu. 2% depreciation in first eight months
Governor Valdez Albizu said that throughout the current year the relative stability of the exchange rate has been remarkable in the face of the current convulsive international panorama and the behavior of domestic expectations typical of a pre-electoral period. In this regard, he informed that the exchange rate has presented an accumulated depreciation in the January-August 2019 period of just 2.0%, lower than that observed in the same period of the previous year of 3.0% and among the lowest in the countries of America Latin and emerging economies.
The governor explained that the growing uncertainty of the international environment, mainly associated with trade disputes between the United States of America and China and the escalation of geopolitical tensions in different areas of the world, has led to an appreciation of the US dollar internationally and, consequently , exchange pressures in the rest of the advanced economies and emerging economies that have exacerbated in recent months.
Valdez Albizu added that, observing the dynamics of the exchange rate during the first eight months of the year, it is noted that the low depreciation of 2.0% in the Dominican Republic during the period January-August was considerably lower than the accumulated depreciations in most of Latin American countries. Specifically, the countries with the highest accumulated depreciation were: Argentina (36.0%), Uruguay (11.6%), Brazil (6.4%), Colombia (6.2%), Paraguay (5.0%) and Chile (3.6%). Similarly, the main emerging economies have registered significant depreciations in the January-August period, mainly Turkey (9.3%), Brazil (6.4%), South Africa (5.6%) and China (3.9%).
He indicated that the difference in the level of depreciation between countries is more pronounced if only what happened in the month of August is analyzed. While the Dominican Republic presented a monthly depreciation of just 0.5%, the currencies of almost all Latin American countries presented significant depreciations in August, highlighting Argentina (25.7%), Brazil (8.4%), Uruguay (6.3%), Colombia (5.8 %), Mexico (5.0%), Paraguay (3.7%) and Chile (3.3%). Similarly, the larger emerging economies presented monthly depreciations much higher than the Dominican case, such as South Africa (6.5%), Russia (4.8%), Turkey (4.7%), India (3.6%), China (3.8%), Malaysia (1.9%) and Indonesia (1.2%).
"One point to note is that, in this challenging international environment, the Dominican Republic has managed to maintain the relative stability of the exchange rate, while inflationary pressures have remained low," said the governor. In fact, as of August, cumulative inflation was only 1.99%, while year-on-year inflation from August 2018 to August 2019 stood at 1.72%, which makes it possible to state that by the end of the year the inflation rate would close at around the lower limit of the goal of the Monetary Program of 4.0% ± 1.0%. Regarding the interannual core inflation, which reflects the monetary conditions of the economy, it was 2.06% at the end of August.
He considered that a result derived from the behavior of the nominal exchange rate and the low inflationary pressures observed so far this year, is that the real exchange rate has remained at competitive levels, benefiting the Dominican external sector. In particular, foreign exchange generating activities, such as foreign direct investment and remittances have registered a good performance, compensating for the recent moderation of tourism.
“The macroeconomic fundamentals of the Dominican Republic, together with the relative stability of the exchange rate in a context of low inflationary pressures, have created the spaces for a more active monetary policy,” indicated Valdez Albizu, recalling that, in this context, the BCRD approved significant reductions in the monetary policy interest rate, while releasing some RD $ 34,364.6 million of the legal reserve, of which about 55% of the total amount has been placed to date , about RD $ 18,843.5 million.
He added that, in addition to resources from the legal reserve, financial institutions have made loans with their own funds for an amount similar to the placements made since the measure was adopted. For that reason, the total private credit granted by financial institutions in national currency amounts to some RD $ 37.4 billion, since the legal reserve was released. Moreover, if the January-August period is taken into account, the total increase in loans in national currency reaches RD $ 57,278 million, a growth of 6.5% since December 2018 and an expansion of 10.0%, compared to August last year.
Valdez Albizu considered that the BCRD measures are in line with the behavior of other central banks that, in this difficult international environment, have adopted expansive monetary policies. Among advanced economies, the Federal Reserve of the United States (EDF) reduced its monetary policy rate (MPR) for the first time in ten years, last July. Despite this reduction, the Fed has received strong pressure from the Executive Branch to adopt more aggressive rate cuts. On the other hand, the European Central Bank (ECB) announced this week new net purchases of bonds for about 20,000 million euros per month, as a way to provide liquidity to the economy. The ECB also reduced its interest rate for bank deposits due to excess liquidity by 10 basis points, bringing it to -0.5%, that is, a negative return on deposits.
He indicated that, in Latin America, all the economies that operate under the inflation targeting scheme have reduced their monetary policy rates this year, with the sole exception of Guatemala. At the end of August, Brazil's monetary policy rate (MPR) is at a historical low of 6.0%, while in Chile, the MPR is at 2.0% and in Peru at 2.5%. Colombia and Costa Rica maintain their monetary policy rates at 4.25% and 4.0%, respectively. It should be noted that countries such as Brazil, Chile and Costa Rica have also adopted measures to provide liquidity to the productive sectors, similar to those applied by the Dominican central bank.
He stressed that, compared to the policy rates in the region, in the Dominican Republic the MPR is currently 4.5%, indicating that there are still spaces, if necessary, additional rate cuts before external and internal externation adverse.
Valdez Albizu reiterated that the Central Bank of the Dominican Republic ratifies its commitment to economic stability and informs that it will remain attentive to the evolution of both international and domestic uncertainty factors that could have an adverse impact on the economy. In that sense, it reaffirms its intention to drive monetary policy towards achieving its inflation target in an environment of sustained growth and relative stability of the exchange rate.