Tunisia's central bank raised its key interest rate by another 100 basis points to 7.75 percent, saying continued inflationary pressures require "appropriate measures" to reduce the negative effects from inflation to the economy and the threat to purchasing power.
The Central Bank of Tunisia (BCT) has now raised its rate by 350 basis points since April 2017, with the previous hike in June 2018.
Tunisia's headline inflation rate eased to 7.1 percent in January from 7.5 percent in December and an average 7.3 percent in 2018, but the central bank said in a statement from Feb. 19 that its board had strong concerns over the outlook for inflation, particularly core inflation that is expected to continue its upward trend given the expected evolution of all inflationary indicators.
In June 2018 Tunisia's inflation rate hit 7.8 percent, the highest since 1990.
The central bank's board pointed to the continued current account deficit that hit a new record of 11.2 percent of gross domestic product in 2018 from 10.2 percent in 2017, and called on all parties to redouble efforts to contain the trade and current account deficits and improve the level of assets in foreign currency and the functioning of the foreign exchange market.
BCT added the positive evolution of tourism and transfers from Tunisians abroad did not compensate from a worsening of the trade deficit, which meant foreign currency reserves only had a cover of 84 days in 2018, down from 93 days in 2017.
Tunisia's economy slowed in the fourth quarter of last year to growth of 2.2 percent year-on-year from growth of 2.8 and 2.9 percent in the previous two quarters.
In addition to monetary policy, the central bank's board also approved the bank's first 3-year strategic plan that aims to establish a clear and transparent governance framework for monetary policy, to implement a macroprudential framework to prevent risks, strengthen management of the payment system to reduce the use of cash in the economy, work to gradually lift foreign exchange resections and improve the collection and processing of data.
Last October the International Monetary Fund (IMF) called on BCT to tighten its monetary policy further as real rates remain negative to reduce inflation further and avoid an erosion of purchasing power and help anchor inflation expectations.
On Sept. 28, 2018, the IMF's executive board approved the payment of a US$247 million loan tranche to Tunisia, the fifth under a program that is tied to economic reforms agreed under a 4-year arrangement from May 2016.
"Monetary policy focuses on curbing inflation, and continued exchange rate flexibility will help strengthen international reserves," the IMF said, adding Tunisian authorities' efforts to reduce macroeconomic balances are bearing fruit but unemployment and inflation remains high, high oil prices continue to weigh on external and fiscal balances, and investments are weak.
