Wednesday, May 24, 2017

Tunisia raises rate another 25 bps to curb inflation

     Tunisia's central bank raised its key interest rate by a further 25 basis points to 5.0 percent in order to limit the impact on the economy from rising inflationary pressure and a growing current account deficit.
     The Central Bank of Tunisia (CBT) has now raised its rate by a total of 75 basis points this year following a 50 point hike in April at an extraordinary meeting of its board following a sharp fall in the dinar's exchange rate.  This was the CBT's first change in rates since October 2015.
     Meeting on May 23, the CBT board said it had taken note of the rise in inflation in recent months.
     Tunisia's headline inflation rate rose to 5.0 percent in April from 4.8 percent in March and 3.4 percent in April last year. Underlying inflation, which excludes fresh and farmed products, was 5.9 percent.
      The central bank said there was growing pressure on bank liquidity from a widening current account deficit and an increased need for funds by the state budget. This has led the central bank to step up its interventions in the money market.
      The central bank also said it had worked to ensure a balance between supply and demand in the foreign exchange market to help mitigate fluctuations and gradually restore stability.
      The April rate hike came in the wake of a slump in the dinar following a call by the International Monetary Fund on Tunisia to adopt a more flexible exchange rate. Tunisia's finance minister then said the central bank would reduce its interventions in the foreign exchange market to the value of the dinar gradually declines to help boost exports and lower imports, reducing the trade deficit.
      The IMF also said on April 17 that tighter monetary policy would help counteract inflationary pressures, give further flexibility to the exchange rate, and narrow the trade deficit.
     On April 20 and 21 the dinar fell by almost 9 percent to 2.52 to the U.S. dollar but it then rebounded in the following days. 
     Today the dinar was trading at 2.42 to the dollar, down almost 5 percent this year.
     The central bank welcomed improved economic growth in the first quarter of this year and called for further consolidation of growth in light of the major economic challenges and financial difficulties facing the country.
     Tunisia's Gross Domestic Product grew by an annual rate of 2.1 percent in the first quarter of this year, up from 1.1 percent in the fourth quarter of last year.
     The IMF expects growth to double this year to 2.3 percent. However, this is still too sluggish to significantly lower unemployment, especially in the interior parts of the country and among the youth.
    Tunisia's official unemployment rate eased to 15.3 percent in the first quarter from 15.50 percent in the previous two quarters.



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