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Bump in the interest rates pushes Central Bank to take measures

The weighted average rate climbed 173 basis points in less than two months

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Bump in the interest rates pushes Central Bank to take measures
SD. Since February, the interest rates for the loans from the multiple banks, and the rest of the financial sector have been climbing. They have gone up as much as two percentage points in less than two months, estimates economist Arturo Martinez Moya.

It is expected that this tendency begins to reverse itself starting today, April 1, 2015, when the reduction of 50 basis points in the rate of the monetary policy goes into effect, which goes down to 5.75%. This measure was announced last Monday by the Central Bank. In addition, the Friday before, the entity freed the legal reserves by RD $10 billion.

The upward trend goes back to 9 February, when the governor of the Central Bank, Hector Valdez Albizu, in an unexpected press conference, announced a 2% increase in the legal reserves required of the banks. He also announced the injection of up to US $200 million in the exchange market, for the purpose of "stopping the irregular behavior of the exchange rate," which had pushed the rate beyond RD $45 pesos per dollar.

On that occasion, in an unusual manner, the Central Bank Governor referred to "rumors" about supposed collateral operations by the banks, consisting in the purchase and sale of currency, as a measure to compensate for the fall in income in their credit card operations. It was explained that this was due to a resolution by the Monetary Board which significantly reduced the interest rates applied to the plastic money. The scarcity of dollars "has to do with the competition which has occurred in the handling of the greatest amount of currency," said Valdez.

The measures announced at that time stabilized the exchange rate below RD $45 to the dollar, but also took some RD $14 billion out of circulation. Nevertheless, in response, the commercial banks "increased the interest rates more than they should have," an event described as a "monopolistic attitude" by the economist Arturo Martinez Moya.

During January 2015, the average weighted lending rate by the multi - banks was 14.13%, while the borrowing rate was 6.62%. But by March, the average weighted rate of the active and passive interest reached 15.86% and 7.07%. In the case of the active rate or that used for loans, the increase was 173 basis points (1.73 percentage points).

The banks not only increased their financial income with the increase of the interest rates, but also with the increase in their brokerage fees, by raising the active rate in relation to the passive rates in a greater proportion. This increased the net income of the banks, noted Martinez Moya.

The measures ordered by the Monetary Board on last 9 February, justified an increase of only 50 basis points (0.5 percentage points), estimated the economist.

To this one has to add the fact that the increase in the legal reserve did not mean that the banking business of loaning money was reduced.

As of 20 March 2015, the numbers drive home this statement. In relation to the same month of 2014, the loan portfolio of the multi - banks for the private sector grew by 14.1%, to reach RD$418.9 billion.

It is expected that with the updating of this information, to 31 March, it is possible that we see that the growth was even greater.

Higher interest rates, higher brokerage fees, and a notable growth in credit are the ingredients for a perfect credit operation for the banks: greater net financial income. The Dominican banks carry out their businesses in an international context of low interest rates. "In Europe it (the interest rate) is on the ground and in the United States also," observed Martinez Moya. In addition, in the country "inflation is going down a lot," he added. But as a heart arrhythmia of the economy, in the Dominican Republic the interest rates go up "in excess."