Strong respect and credibility, generating confidence
“Blood, sweat and tears” is how Héctor Valdez describes the efforts of staff at the Dominican Republic’s central bank over the past 13 years. Since becoming governor in 2004, just as a domestic banking and economic crisis spiraled, Valdez says the team has worked tirelessly to professionalise and institutionalise the country’s central bank. He points to the introduction of inflation targeting in 2012 as an example of a major step forward. Today, Valdez commands exceptionally strong respect and credibility in the role and is seen as having generated huge confidence in the institution that he leads. “Others can deliver stable indicators but Valdez stands out for being particularly effective in interacting with the market,” says one observer.
Annual inflation has remained firmly in check in recent years and the Bank is transparent in its monetary policy decisions. The Bank’s monetary policy committee cut interest rates by 50bp, to 5.25%, at its July meeting as inflation fell below the bottom of the 3%-5% target range.
“Over the next 12 months, we see that there is room to meet the central bank’s inflation target providing there are no unexpected events,” says Valdez.
Unfortunately, it is the season for unexpected events in the Caribbean. Valdez spoke to GlobalMarkets shortly after Hurricane Irma had grazed the northern coast of the island and noted that the republic was lucky not to have much damage to its agriculture and farming industries.
“Hurricanes and floods threaten price stability in any economy that produces food, such as the Dominican Republic,” he says. “We need to be alert as we still have several months of the hurricane season left this year.”
Meanwhile Hurricane Harvey — which did not even come close to the country, hammering Texas instead — is set to have a direct economic impact all the same. That’s because fuel prices have a direct connection to price stability for the Dominican Republic, he says.
“Oil has had some price fluctuations this year,” says Valdez. “But the impact of hurricanes Harvey and Irma and the probability of larger production cuts by Opec could cause upward pressure on the price of oil in the short term.”
Another important challenge for Valdez, however, is not directly related to monetary policy. Rather, it comes in the form of succession planning. Much of the bank’s credibility hinges on confidence in Valdez himself. And while there are no plans for his departure yet, some are already questioning if the institution can be perceived so robustly after the governor, who turns 70 next month, does step down. Valdez for his part argues that a deep bench of highly qualified policy advisors within the bank, as well as the institution’s legally guaranteed independence, will ensure stability and a smooth transition when he does eventually depart the bank.
“It’s not a question of just one person,” he says.