Raising the key rate will not help us

And hop! We use the same methods and hope for a different result. Not once, not twice, not three, not ten. Once again, the Central Bank of Tunisia (BCT) decided to raise its key rate to curb galloping inflation.

So, on Tuesday, May 17, 2022, BCT decided to raise the key rate by 0.75% to 7%.

A unilateral decision made without any controversial public discussion.

This theory about raising the key rate to curb inflation has been repeated to us dozens of times, and hardly anyone is trying to question it. We take what the Central Bank tells us at face value, as if its decision makers have implemented the science.

In particular, BCT hopes that this increase in the key rate will have a mechanical effect on prices.

Except that the direct consequence here is that this increase will penalize companies whose monthly loan payments increase. Mechanically, this will affect the prices of their products. So, about the end user.

The question that merits discussion between various economic players is whether we should have a high key rate or not. These debates rarely occur in public. BCT has always acted alone in its own corner, imposing its dictates on everyone: politicians, businesses and consumers. The Tunisian is simply infantilized by his central bank.

In developed countries, the discount rate is close to zero. Despite the rapid rise in inflation in the euro area, in March last year, the European Central Bank decided to keep its key rates unchanged. The deposit rate is set at -0.5% and is zero for the refinancing rate.

In Canada, the key rate rose from 0.5% to 1% in April, and it is planned to raise it to 2% by 2024.

In the United States, the Fed raised its key rate in March last year, for the first time since 2018, and placed it in the range of 0.25% to 0.5%.

Meanwhile, here and there, debates are going on in the square. Here and there we’re getting a little sneaky and announcing it a few weeks in advance.

In our country, this discussion is absent, the UGT imposes its decisions without warning, and the population orders.

However, it should be noted that if the Central Bank of Tunisia adopts the same policy as its European or Canadian counterparts. That is, if he accepts low key rates (from 0 to 2), the Tunisian economy will benefit.

It is clear that this mechanism of raising the key rate to curb inflation is not always correct.

Bertrand Schepper, a researcher at the Institute for Social and Economic Research and Information (Iris, Canada) is categorical: “raising the key rate will not help you.”

In this beautiful analysis published by Iris, he explains: “ the increase in inflation is caused by exogenous factors, i.e. rising oil prices, shortages of some grain products and many problems affecting international distribution chains. These phenomena, which have intensified with the war in Ukraine, are mainly the result of the global health crisis and the effects of global warming. However, the increase in the key rate will not affect any of these factors.. (…)

When inflation is caused by endogenous factors (which are related to the internal dynamics in the country), such as excessive purchasing power associated with excessively high wages, a key rate increase will have the desired effect, i.e. a drop in consumption and therefore inflation. »

But inflation in Tunisia is not caused by endogenous factors and, until further notice, wages in Tunisia are far from high.

Raising the key rate will not provide sudden access to more oil at the international level and will not solve problems with the supply of products from Asia or Europe. In doing so, the impression is that the central bank is acting to counter inflation, but in doing so, it may worsen the lives of millions of people. says Mr. Schepper of Canada and Central Bank of Canada.

The parallel between what is happening in the Eurozone or North America and Tunisia is important and worth discussing.

BCT regularly raises its key rates without any discussion.

Under the pretext of curbing inflation, he punishes thousands of companies. These are companies that employ millions of people, and it is they who feed the resources of the state with their taxes.

For BCT, inflation is a priority. Is an. But who decides what is a priority and what is not? Shouldn’t debate between different actors be necessary to resolve the issue?

What evidence does the BCT provide to say that a key rate hike affects inflation? The fact is that Tunisian companies are heavily penalized with their policies and the 7% rate. They suddenly slow down any investment (because it becomes expensive) and hence growth.

Instead of trying to curb inflation, the BCT may seek to stimulate growth, as its counterparts in developed countries do.

So far, his high key rate methods have shown their limits, and it may be time to change them to hope for a different outcome.

One could argue that without this monetary policy, the situation could be worse and that the Canadian researcher mentioned above or the decision makers at the ECB are no smarter than the BCT board members.

Is an. But let BCT talk about it! Let her discuss it! May this bring the debate into the public arena!

Raouf Ben Hedy