It is the first rate hike by the Central Bank of Tunisia (BCT) following the arrival of its new governor, Marouane el Abassi, who was appointed by the parliament on Feb. 15 after his predecessor Chedly Ayari reluctantly resigned the day before after being fired by Prime Minister Youssef Chaded.
In his speech to the parliament, Abassi - a former World Bank official and economics professor - said Tunisia was facing an extraordinary period that has to be dealt with extraordinary measures.
In addition to rising inflation, Tunisia is facing dwindling foreign reserves as foreign investment and tourism still hasn't fully recovered after attacks by Islamist militants in 2015.
Cuts to government subsidies and price hikes by the government on Jan. 1 were met by widespread protests throughout the country. The government then offered assistance to low-income households to cushion some of the impact of higher prices.
The efforts to reduce fiscal deficits and modernize the economy are part of Tunisia's 4-year, $2.83 billion economic reform program agreed with the International Monetary Fund (IMF) from 2016.
Adding to the country's troubles, the European Union has included the country on a blacklist of 17 jurisdictions it deems tax havens, triggering the firing of the Ayari.
Tunisia's inflation rate accelerated to 7.1 percent in February from 6.9 percent in January and an average rate of 5.3 percent in 2017. Abassi told the parliament that inflation could hit 10 percent if the central bank didn't act.
In December the central bank already widened its interest rate corridor to 100 basis points on each side of the key rate, pushing up the marginal loan facility rate to 6.0 percent.A rise in money market rates in Tunisia to 5.61 percent last month called for a change to the key rate to ensure coherent rates, the BCT said in a statement from March 5.
Given that international commodity prices, including energy, are likely to rise, the central bank expects "further inflationary pressure over the forthcoming period," describing the rate hike as "proactive action."
Last week the central bank said foreign exchange reserves had dropped to 11.25 billion dinars, enough to pay for 78 days of imports, from 11.9 billion on Feb. 7, the lowest in 15 years.
Tunisia's dinar has been weakening since March 2014 and fell 6.5 percent in 2017 against the U.S. dollar. But this year it has bounced back and was trading at 2.38 to the dollar, up 3.3 percent.
Against the euro, the dinar fell 18 percent in 2017 but has been steady this year, trading at 2.96.
The Central Bank of Tunisia issued the following statement:
"The Central Bank’s Executive Board held its periodical meeting on 5 March 2018 and considered the different points outlined in the agenda.
After an in-depth analysis of trends in monetary aggregates and macroeconomic data, as well as in the national economic situation’s advanced indicators, the Board decided to raise the BCT key rate by 75 base points, bringing it thus from 5% to 5.75% per year.
This action has been decided to face up to the real risks of an ongoing inflation in 2018, having already posted 7.1% over February against 4.6% over the same month of 2017 and 5.3% on average in 2017.
An acceleration of inflation was recorded in the beginning of the current year in line mainly with the strong progress of the consumer price index over January 2018 by 1.1% (against 0.4% in December 2017).
In anticipation of this inflation speedup, the Executive Board has already decided, as at the end of December 2017, to widen the corridor to 100 base points on both sides of the BCT key rate, giving way to a marginal loan facility rate of 6%.
Following this significant action on the corridor, the money market rate rose to 5.61% in February 2018. This calls for an adjustment of the key rate with a view to ensuring a coherence of rates on the money market.
Moreover, a certain number of advanced conjunctural indicators, particularly the likely soaring of international commodity prices, mainly energy, foretell further inflationary pressure over the forthcoming period.
The Central Bank’s concern about preserving citizens’ purchasing power and favouring the conditions of a sound growth, the premises of which start to take shape in the very beginning of 2018, incites a proactive action through monetary policy tightening based on the interest rate as a privileged tool for a better allocation of financial resources."
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