Tunisia moving closer to a free float - good news
By Lars Christensen, Founder & CEO, Markets & Money Advisory
Yesterday the Tunisian central bank hiked its key policy rate by 50bp to 4.75%. The decision comes on the back of the recent weakening of the Tunisian dinar.
The weakening reflects the deliberate decision of the Tunisian government and central bank to allow for a more freely floating dinar. Overall we think this decision is very good and the IMF supports the decision.
The move towards a free float is likely to be gradual and it is clear that the central bank likely will continue to intervene in the FX market to stabilize currency moves.
However, we strongly believe this is the right decision, which will help reduce the external imbalances in the Tunisian economy.
The main challenge for the Tunisian central bank now is to formulate a clear and coherent monetary policy framework to ensure nominal stability. It goes without saying that the Tunisian government will make the central bank's job a lot easier by implementing structural reforms to increase potential growth in the Tunisian economy and improving public finances to reduce Tunisia's external imbalances.
Overall, we do not think there at the present moment is a need for monetary tightening and our indicator for Tunisian monetary conditions overall indicates that monetary conditions are broadly neutral (the indicator is close to zero) and even though we expect inflation to increase in the coming months on the back of the depreciation of the dinar we would expect that increase to be temporary given the present monetary stance.