Tunisian Central Bank Holds Policy Rate at 7% for Tenth Consecutive Month
The Board of Directors of the Central Bank of Tunisia (BCT) has decided to maintain the policy rate at 7%, marking the tenth consecutive month of inaction. Opinions are divided among policymakers and analysts: some advocate for an easing of monetary policy to support a struggling economy, while others fear that a premature rate cut could reignite inflation and exert fresh pressure on foreign exchange reserves.
A Delicate Economic Context
The current economic landscape is characterized by slowing growth, hovering around 2.3%, and inflation at 5.6%, with particular tensions in fresh food prices. Compounding these challenges are a heavy energy bill and foreign exchange reserves under close scrutiny. In this environment, the option of maintaining the status quo appears the most prudent.
The Temptation of Easing and Its Risks
The immediate instinct in the face of weak growth is to lower the policy rate to "oxygenate" the economy, stimulate bank lending, and revive investment. However, in Tunisia’s specific context, this maneuver carries significant risks.
1. Cost-Push Inflation
Current inflationary trends are partly driven by exogenous factors. Injecting liquidity or reducing the cost of money risks aggravating aggregate demand without stimulating the blocked productive apparatus. This dynamic could fuel an inflationary spiral, particularly through cost-push mechanisms.
2. Pressure on the Dinar and FX Reserves
A rate cut would reduce the attractiveness of dinar-denominated savings, further weakening net foreign exchange assets. There is a strong correlation between the level of the dinar and the policy rate; lowering rates could undermine currency stability and deplete reserves.
Why Raising Rates Is Also Not the Answer
While raising the policy rate is a standard solution when inflation is demand-driven or accelerating hyper-inflationarily, it is not suitable for Tunisia’s current situation. Tunisian businesses are already suffering from liquidity constraints and high financing costs. Increasing the policy rate would instantly raise credit costs for SMEs, paralyzing private investment and worsening stagflation. The banking sector, already burdened by classified loans, cannot afford another shock.
The Rationale for Holding Steady
Maintaining the policy rate at 7% is the most rational and prudent decision. It avoids adding to the financial burden on economic agents while sending a clear signal of vigilance regarding underlying inflation trends and international energy prices.
In an open economy heavily dependent on energy and food imports, preserving the value of the currency and maintaining a safety cushion in foreign exchange reserves takes precedence over artificial stimulus through administered credit. This balanced approach aims to stabilize the macroeconomic environment without exacerbating existing vulnerabilities.
