Franco Uccelli of Bear Stearns explains that tighter monetary controls and increased dollar inflows have been contributing to the reduced foreign exchange rate and consumer price stability in the DR. He explains in his 11 August release that a higher-than-expected current account surplus during the first half of the year, in addition to a small contraction in the size of the country’s monetary since the end of 2003, have increased the supply of dollars and limited the availability of pesos in the local market, easing pressure on both the currency and inflation.
Uccelli points out that the Dominican peso has been trading at RD$43.5 pesos per US$1, down from a RD$48.5 average in June and RD$45.4 in July.
Meanwhile, he says, just-released Central Bank data on inflation for July show a marked decrease in the monthly rate to a mere 0.6%, down from a 1.9% average during the past four months, and a 10.2% average during the first two months of the year. He reports that in July the DR recorded its lowest inflation level since April 2003, the month before the country’s worst financial crisis in recent history erupted.
In his analysis, Uccelli says that July’s results have brought down the trailing 12-month inflation rate to 55.6%, from a 65.3% high only two months before, producing a year-to-date rate of 31.9%. ?Should the recent downward trend in inflation be sustained, the year-end rate would come in at less than 40%,? he writes, concluding that forward-looking inflation is now running in the 20% range.
Uccelli comments that the recent appreciation of the exchange rate and increased dollar liquidity levels have enabled the Central Bank to enhance, albeit modestly, its international reserves. New, lower inflationary pressures have also allowed the monetary authorities to lower the interest rate it pays on its CDs, and to extend their expiry dates. He points out that the most-recently issued Central Bank CDs pay rates averaging 50%, compared with 60% only a few weeks back. The majority of the certificates now carry six-month terms, compared with terms of less than 60 days a couple of months ago.
Furthermore, he adds that the market is encouraged on the monetary front by the appointment of Hector Valdez as the next Central Bank governor.