The increasingly favourable inflationary environment is gradually lowering of interest rates.  However, the government complains that the improved interest rate environment is not being reflected in current loan rates and that the high cost of borrowing is curtailing a more pronounced recovery in consumption and investment.  As a result, the new Central Bank reform bill may be used as a pretext to fix the upper and lower limits on the interest rates for loans and deposits.

Growth prospects remain healthy.  Recent economic indicators show that lower interest rates and the decline in unemployment (10.2% in December down from 12.1% in November) are driving a strong consumption recovery.  The Venezuelan Automotive Chamber (Cavenez) reports that automobile sales increased 25.8% in February over the same month last year.  Additionally, the opening of the telecommunications sector served to give a strong boost to foreign direct investment, which reached US$ 376 million in January, up from US$ 50 million for the same month last year.  The strong January inflow also raised the cumulative annual foreign direct investment inflows to US$ 912 million, up from US$ 537 million in January 2000.  The Consensus has consumption growth remaining healthy this year but declining from the 4.8% expansion in 2000 to 4.3% growth this year.  Investment, on the other hand, is anticipated to pick up strongly from last year’s 2.0% growth, reaching 8.0% this year.  The acceleration of private sector economic activity, combined with an expansive fiscal policy will further boost the economy, which is expected to grow by 4.1% this year, a notch below the Central Bank’s projection of 4.9% (raised from 4.5% in February).  Panellists remain optimistic that the current favourable economic growth trajectory will be maintained through next year but to moderate, with growth dropping to 3.5%.

Inflationary expectations declining.  In February, consumer prices increased 0.48% over January, about half the rate experienced in December 2000 and January.  Annual inflation, nevertheless, inched up to 12.7% from 12.6% in January, driven principally by continued price increases in the services sector, where communications, transport and health prices rose 22.7%, 19.8% and 17.6% respectively over the same month last year.  Even though inflation remains at a decade low, panellists expect that increased economic activity will have the government falling short of the 11.0% inflation target for this year.  However, participants continue to gain confidence in the Central Bank’s ability to control inflationary pressures.  In fact, this month’s Consensus figure was again lowered significantly.  This month’s inflation forecast of 12.9% is 1.1 percentage points below the forecast for last month and 4 percentage points below the projection 90 days ago.  Owing to the continuous downward adjustments in inflationary expectations, the Consensus data are gradually converging with the Central Bank’s 11.0% target for this year.  However, most participants do not anticipate inflation to drop further.  The average inflation forecast for 2002 remained unchanged at 12.9%.

Interest rates declining.  Favourable inflation prospects should enable the Central Bank to apply some monetary easing to bring down interest rates.  The benchmark interest rate for 90-day deposits has dropped 234 basis points since the end of December, closing February at 11.2%, the lowest level since March 1997.  Even though participants expect some monetary tightening to occur as the result of the pick-up in domestic economic activity, interest rate forecasts have been revised downward to reflect the more favourable inflationary environment, with the benchmark rate year-end projection dropping from 15.6% last month to 13.3% in this month’s publication.  However, the government complains that the improved interest rate environment is not being reflected in current loan rates charged by banks, which were at 21.1% at the end of February.  

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