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Tunisia interest rates may rise in Oct to fight inflation Central bank says it may hike rates by 25-50 basis points to keep inflation within tolerated rate of around 5 per cent
Tunisia's central bank may hike interest rates by 25-50 basis points as early as this month and launch new caps on bank lending in the coming days to rein in inflation fuelled by rampant consumption, its governor said on Monday. "Inflation is too high for me. And if things continue, which is very likely, we will be very close to 6 per cent by the end of the year compared to an average of 3 per cent before the revolution," Chadli Ayari told Reuters on the sidelines of an Arab central bankers' conference in Kuwait. "It worries me very much. I will fight it with monetary instruments. My first monetary instrument is the rate of interest. I will raise it," he said. The central bank last tightened its key interest rate by 25 basis points to 3.75 per cent on Aug 29. "I raised it once and I will raise it for the second time probably by the end of October. If things continue at that speed we will probably push up the interest rate by 25 to 50 basis points," he said. The central bank is not targeting a particular inflation rate but the most that should be tolerated would be 5 per cent, Ayari said. "If it reaches 5 per cent, I won't move. But beyond that I have to move. We cannot just witness inflation going up without moving - that would be catastrophic," he said. The central bank will also require commercial banks to put in an equivalent of the amount of credit provided as an obligatory reserve to clamp down on consumer loans. "Lend whatever you want but the equivalent you put in as a reserve so a banker will think twice. We will do it in the coming days," Ayari said, adding that would help contain inflation. Credit growth is around 9-10 per cent but 80 per cent of that growth goes on consumption and only 20 per cent into equipment and investment, he said. "If credit growth was 15 per cent but mostly went to investment I would not do anything." Tourism has helped to spur Tunisia's economic recovery after the political upheaval last year that marked the start of the 'Arab Spring', but this and other foreign currency earning industries have been held back by the crisis in the euro zone, the country's major market. Tunisia's economy shrank 2.2 per cent in 2011, for the first time in history, Ayari said. He saw growth of more than 3 per cent in 2012 but voiced some concern about foreign currency reserves, which have fallen to about 96 days of imports. "It is a little worrisome but not catastrophic. I believe four months of imports will make you comfortable," he said. Credit-rating agency Standard&Poor's cut Tunisia to junk with a two-notch downgrade to BB in May, citing weaker-than-expected economic, fiscal and external debt indicators despite overall political stability. The country still has investment grade ratings of BBB from Fitch and Baa3 from Moody's. "If we firmly improve on the investment grade, I will advise the government to go to the market even if we have to pay 4 per cent, LIBOR plus something," Ayari said. "So probably not 2013. If things go well, my impression is that I will advise to go to the market in 2014." In the meantime Tunisia would seek funding from institutions such as the World Bank, International Monetary Fund, European Bank for Reconstruction and Development as well as bilateral aid, he said. http://english.ahram.org.eg/News/54532.aspx