June inflation’s numbers clearly worried the Government as the monthly CPI reached 1.8%, given a 12 month inflation of 19.4%. The Government spent all week announcing measures to contain inflation, but in the end, the measures announced by the Venezuelan Central Bank were simply to timid, mostly attacking the results of bad economic policy and not the origin of the problems.
The first measure announced was to increase the savings rate, that paid in savings accounts from 6.5% to 8% and that paid in CD’s from 10% to 11%. The theory behind this is that it will somehow encourage savings, reducing consumption, as well as discouraging people from buying dollars in the parallel swap market. However, all the Central Bank has done is go from rates which are extremely negative to rates that are still extremely negative and this increase will do very little in terms of encouraging savings. In fact, there is a very simple way of looking at it: Currently most Venezuelan bonds denominated in US dollars, whether corporate or sovereign, yield near or above 8% per year, so that anyone with savings would recieve the same yield in US$ than in Bolivars, with the difference that the capital is protected both from the effect of inflation or from a possible (and likely!) devaluation. Thus, we expect little effect from this measure.
The second measure announced was the increase of bank’s reserves from 15% to 17%, as well as increasing reserves for repos from 13.25% by 0.25% per week until the rate reaches 17%. This measure will sterilize some US$ 1 billion, which is not very much compared to current monetary liquidity which stands around US$ 55 billion. Moreover, this is a one time shot, once that liquidity is sterilized, there will be no addition to it. Once more, we expect little from it.
Finally, the Central Bank eliminated the issuing of 14 day repos to suck up liquidity and created a 54 day CD at a rate of 11%, one percentage point over the 30 day CD’s currently in use which have been issued in the amount of US$ 15 billion. This measure may have some impact, but it is hard to gauge until one sees the response of financial institutions to it. To be somewhat effective, the Central Bank would need to issue an additional US$ 5 billion, but this will depend on the interest by financial institutions to lock their excess liquidity up for an extra 24 days in order to gain 1% point. In any case, this will have an additional cost if successful.
None of these measures will have an effect unless the Government attacks the origin of the problem: the extraordinary growth in monetary liquidity created by its own excess spending. But clearly the Government has no plans to attack this part of the problem. Moreover, besides the high liquidity, the Government forced inetrest rates down to an artificial level but is now afraid of turning them up. These low rates have encouraged people to borrow and this puts pressure on prices.
The Government’s contradictions on economic policy were quite clear when yesterday the Head of the Finance Committee of the National Assembly advocated higher interest rates for credit cards to discourage consumption, while the Superintendent of Banks called for the same rates to be dropped by three percentage points.
Unfortunately for the Government (and us!) the second half of the year usually yields more pressures on prices as the school year begins, merchants get ready for Christmas and rains interfere with agricultural production. This month there will be a one shot impact on the CPI of 2%, as the value added tax was dropped by that amount, but this does not address the root of inflaitonary pressures and simply gives an illusory lower rate for a short period of time.
What is clear is that the 12% inflation targe of the Government is unreachable and so will be the new 14% level. By the end of the year, we will have a number more like 17-18%, which covers up the true underlaying inflation of 22-23%, which has been masked by the 5% reduction in the VAT.