Rates in Egypt and Tunisia head in opposite directions

Interest rate moves in Egypt and Tunisia this month highlighted the important role that balance of payments positions are playing in monetary policy decisions. In Egypt, tighter fiscal policy and the devaluation of the pound in late-2016 have contributed to a sharp narrowing of the current account deficit over the past two years – it now stands at less than 2.5% of GDP. This has eased pressure on the pound and, combined with weaker price pressures, prompted the central bank to resume its easing cycle this month. In contrast, Tunisia’s current account shortfall has widened to more than 11% of GDP and, in a bid to shore up capital inflows, policymakers decided to hike interest rates by 100bp. With austerity on the back burner ahead of elections late this year, further rate hikes and falls in the dinar will be needed in the coming months.