Central Bank Maintains 8% Interest Rate Amidst Inflation Concerns
The Central Bank's administrative council, which met on February 5, 2025, has decided to maintain its benchmark interest rate at 8%. This decision was made based on a set of factors.
Inflation Remains a Concern
Underlying inflation stood at 5.5% in December 2024, still high but decelerating, thanks to a significant drop in the inflation rate of freely priced processed food products (+1.1% in December 2024, compared to 2.4% in November and 14.5% a year ago). This trend reflects the impact of the widespread decline in international prices of basic food products, particularly olive oil. However, fresh food products remain a concern, with an inflation rate of 12.6% at the end of December 2024. Pressure also persists for other products, such as poultry and red meat. The council considers that inflation prospects remain surrounded by upside risks.
External Sector Performance
The external sector is marked by a significant trade deficit, but the current account is supported by the balance of services and factor income. The current account deficit narrowed to -2,748 MTND, or -1.7% of GDP, compared to -3,484 MTND at the end of 2023 (-2.3% of GDP). Excluding energy, the current account posted a surplus of +8,122 MTND in 2024, up from +6,182 MTND in 2023.
Foreign Exchange Reserves Rebuilt
The improvement in the external sector has allowed for the rebuilding of foreign exchange reserves by the end of 2024. These reserves totaled 27,332 MTND (or 121 days of imports) at the end of December 2024, before decreasing to 23,266 MTND (or 103 days of imports) as of February 4, 2025, mainly due to the repayment of a significant external public debt service.
Central Bank's Stance
The Central Bank's administrative council estimates that it is necessary to continue supporting the disinflation process in the coming period.
Our View
We reiterate our view that this decision is economically the best. While waiting for January's inflation figures, recent salary increases, which have added additional purchasing power, are a factor supporting consumption of basic food products, the driver of price increases. The upcoming Ramadan season, which is just a few weeks away, will require careful attention to prices, which tend to rise during this period. The festive season at the end of March will also see an increase in the circulation of banknotes and coins, as is the case every year, which fuels inflation. Furthermore, we must support the dinar over the next few months, until net foreign exchange assets are strengthened. A window of opportunity may open in the second half of the year for a significant decrease (over 100 basis points) in the benchmark interest rate.
