Will the central bank step up before the Fed?

Santo Domingo – There are reasons for the Central Bank to resume the cycle of rate cuts and, while remaining cautious, to get ahead of the Federal Reserve.

Bets that the Central Bank will resume cutting interest rates in the coming weeks after a long pause has increased as markets take it for granted that the Fed will start lowering rates next month.

What seems less clear is whether the central bank will decide to lower domestic rates before or after the Fed does.

And the odds have increased that it will do so before, giving a lesson in courage without losing prudence and its strategic mastery.

The Central Bank has taught such lessons before.
Suffice it to recall that the Central Bank decided on May 31, 2023, to change its monetary policy cycle from restrictive to expansionary by reducing its monetary policy rate from 8.50% to 8.00%, and it did so before significant banks such as the Federal Reserve and the European Central Bank.

The first of four reductions brought its monetary policy rate to 7% by November 30, 2023.

After that, the Central Bank maintained a pause in rate cuts even though the inflation rate has remained below the year-on-year inflation target for eight consecutive months (3.57% in December 2023, 3.30% in January 2024, 3.30% in February, 3.38% in March, 3.03% in April, 3.20% in May, 3.46% in June, and 3.54% in July).

We have stated in writing that the Central Bank has not resumed reducing interest rates because it wants to avoid widening the gap between its monetary policy rate and that of the Federal Reserve, which would discourage the entry of foreign investment into the country.

However, there are increasing signs that the Federal Reserve will begin to reduce its rates by next month at the latest, thus creating space for the Central Bank to do the same.

The first sign is the tremendous pressure on the Fed from the ECB’s decision to cut its first-rate last June. The ECB is taking the lead in the rate-cutting process, a role that used to be reserved for the Fed.

However, as if that were not enough, world stock markets were turbulent on Monday, August 5, as increasing fears of a recession in the United States weighed on them.

And there is more. It has just been reported that Warren Buffett, believed to be the most respected investor in history, has implemented a historic move that has set off alarm bells in the markets: He is building a mountain of liquidity, perhaps motivated by the idea that in periods of crisis, he who has liquidity reigns supreme.

“This move is probably the answer or protection to what is to come for the economy and the markets,” published in the Economist from Spain.

For example, in the last few days, Warren Buffett has sold around 14 million Bank of America shares for a total of 550.6 million dollars. This move is believed to be a response to the foreseeable lowering of interest rates that the US Federal Reserve will implement, which will reduce the financial sector’s intermediation margin and the income it receives from its excess reserves.

So, there are reasons for the Central Bank to resume the cycle of rate cuts and, without losing caution, to get ahead of the Federal Reserve.