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Banks: increase in legal reserves will raise interest rates

SD. The increase in the legal reserve of 2 percentage points “could be reflected in pressures that tend to increase the interest rates,” says the Association of Commercial Banks of the Dominican Republic (ABA). This measure, combined with the announced intervention of the Central Bank in the exchange market, implies a reduction of the amount of money in circulation, which pushes the cost of money upwards, according to the bank Association.

The opinion of the ABA regarding the impact of the increase in the legal reserve is contrary to that expressed by Valdez Albizu, who says that it will be “very little.”

The official noted that the interest rate “has not had a significant movement in the last few days.” To this he added that last Friday, the bank had RD$17 billion on Overnight (surplus liquidity which the banks deposit in the Central Bank for a few days), besides “to have accepted surpluses” of 1 billion pesos. “In other words it is not a problem to move the types of interest,” said Valdez Albizu.

Another measure announced by Valdez Albizu was the injection of between US$150 million to US$200 million in the exchange market, in order to halt what he called “the irregular behavior of the exchange rate,” which had risen above RD $45 per dollar.

But according to the ABA, this exchange movement is part of the seasonal variations which occurred during the first months of the year, when “regularly the exchange rate shows a greater tendency to rise,” as a result of the normal imbalance between income and expenditure of hard currency in the country.

In this way, the spokesman for the commercial banks, with his characteristic caution, contradicts the versions offered by the Governor of the Central Bank that seek to explain the upward movement in the exchange rate; who said that with a reduction in the interest rates on credit cards, the banks, in order to compensate, have carried out collateral operations of buying and selling dollars. This “has to do with the competition which has given rise to handling a greater amount of dollars,” said Valdez Albizu.

A survey

The injection of dollars in the exchange market was expected to be carried out starting Tuesday (yesterday). It was not possible to confirm with the Central Bank if this operation of sale of dollars was carried out.

Nevertheless, during a trip around bank branches of 3 large commercial banks, reporters were able to determine that at the cashier’s window the dollar was sold at RD $45 and was bought at RD $44.55, which are levels similar to those at the close of business last Friday.

Also, the Central Bank reported on its webpage the results of its daily survey at the cashiers that sell dollars in the financial institutions, that reveals that during yesterday (10 February), the exchange rate continued climbing until it reached, on sales at the cashier an average of RD $44.98 and for the purchase of dollars RD $44.55.


The vice president of the Regional Center for will Sustainable Economic Strategies (CR EES), Ernesto Selman, said that he felt that the announcement made by the Central Bank, of injecting between US$150 million and US$200 million in the exchange market is nothing new, because this institution intervenes in the exchange market with a lot of regularity.

According to Selman, during the 2nd half of January, the Central Bank injected US$280 million of its international reserves, and that to announce it now, all they looking for is “a shock effect regarding the expectations.”

In his reading regarding the measure to increase the legal reserves he feels the following: to create the effective demonstration regarding how far the Central Bank is willing to go in order to halt the depreciation of the exchange rate. But, “the depreciation in the exchange rate is something that is happening in all the emerging countries of the world,” he observed.

Pavel Isa Contreras, another of the country’s well-known economists, and research coordinator of the Dominican Observatory of International Commerce at the Intec University, said that he felt that the measures announced by Valdez Albizu were an “overreaction” that could push the exchange rate to an even less desirable level.

In the context in which the inflation rates of the United States and the Dominican Republic are evolving, combined with an appreciation of the peso, the Dominican exports might be negatively affected and not able to compete with the imports.

“The movement of the exchange rate has been fairly stable, and I don’t think that it justifies paraphernalia of this type,” said Isa Contreras, as he referred to the measures announced by Hector Valdez Albizu.

Legal reserve

The legal reserve is the obligation that the entities of financial intermediation have to maintain in the Central Bank a percentage of the total funds deposited by the public in any manner or instrument, whether these are in national currency or foreign currency.

As of December 2014, the surplus of banking reserves, in pesos, was RD$1.43 9 billion and in foreign currency it was US$141.2 million.

Source: DiarioLibre

Category: DR News |

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Last updated March 24, 2017 at 12:37 AM
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