banking

BCT strongly concerned about inflation risks

May 18, 2022

(TAP) - The Executive Board of the Central Bank of Tunisia met on May 17 and reviewed recent economic and financial developments.

On the international level, the latest information available indicates a rapid and widespread acceleration of inflation in the world, contrasting with a sluggish recovery of global growth, weakened by the fallout of the Russian-Ukrainian crisis.

Despite the downward revision of global activity, prices continue to move in line with developments in the crisis as the near-universal surge in international commodity prices and persistent supply chain disruptions have intensified, adding to inflationary pressures across the price chain. These pressures may be more persistent than expected.

Against this backdrop, several central banks around the world have moved to tighten their monetary policies.

At the domestic level, economic activity, supported mainly by the industrial sector, continued its gradual strengthening in the first quarter of 2022, reaching 2.4% year-on-year against 1.6% one quarter earlier. The industrial sector has largely contributed to the recovery in the exports volume (14% year-on-year from 4.4% in the last quarter of 2021). The sustained increase in imports of raw materials and semi-finished products during the period under review would support the continued recovery of industrial production in the coming months.

In addition, the improvement in the epidemiological situation and the lifting of health restrictions should support the recovery of services, particularly those related to the tourism sector.

On the consumer price side, the Board noted the continued acceleration of inflation, which reached 7.5% in April 2022 (year-on-year), from 7.2% the previous month and 5% in April 2021, the highest level recorded since late 2018.

This rise in inflation is due to the acceleration of prices of manufactured goods, which rose by 9.3% year-on-year (compared to 5.1% a year earlier) and those of food products by 8.7% (compared to 4.9% in April 2021).

On another level, the Board noted that the gradual upward trend in core inflation 'excluding fresh food and products at administered prices' has accelerated since 2021 to cross the 7% mark in April 2022 from 6.6% the previous month and 5% a year earlier.

The Board considered that the diffusion of inflationary pressures from abroad to domestic prices, on the one hand, and the impact of the expected increases of administered prices under the reform of the subsidy system, on the other, would keep inflation at high levels in 2022 and 2023.

At the level of the external sector, the Board noted the widening of the current account deficit which amounted to -2.7% of GDP during the first four months of 2022 against -1.7%, in 2021, due to the deterioration of the trade balance.

In addition, the level of foreign exchange reserves stood at 23,655 MD or 124 days of imports, on May 16, 2022, against 23,313 MD and 133 days at the end of 2021.

The Board expressed its strong concern about the upside risks to the inflation outlook and stressed the importance of economic policy coordination to avoid an inflationary drift that could exacerbate vulnerabilities and jeopardize the recovery of economic activity.

It stressed the need to undertake, as soon as possible, the necessary structural reforms to put economic growth back on an upward trend in order to ensure macroeconomic stability and public debt sustainability.

After an assessment of the risks surrounding the dynamics of inflation and the balance of the external sector over the coming period, the Board decided to raise the Central Bank of Tunisia's key interest rate by 75 basis points, to 7.0%, which would translate into an increase in the deposit and marginal lending facility rates to 6.0% and 8.0% respectively.

With this action, the Board aims to counter inflationary pressures looming on the horizon, and avoid an acceleration of inflation and a widening of the external imbalance.

It was also decided to raise the minimum rate of return on savings by 100 basis points to 6%.

tap.info

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