Venezuela raises rates as strike hurts bolivar

news.ft.com By Jennifer Hughes

Published: January 13 2003 16:10 | Last Updated: January 13 2003 16:10 Venezuela's central bank raised interest rates on Monday in a bid to stem depreciation of its bolivar currency which has been weakened by the strikes that have crippled the country's economy.

The bank raised its key discount rate to 42 per cent from 40 per cent, its first rate hike since October.

The bolivar, which was freely floated in 2002, ended last year down 45 per cent against the dollar and has fallen more than 13 per cent already this year as capital movement was hampered by the strike and Venezuelans sought to transfer bolivar holdings into dollars.

The dollar was worth Bs1,580 on Monday, off an all-time high of Bs1,602 reached last week.

But, as the strike continued, analysts questioned the likely impact of the central bank's move.

"The longer this goes on, the longer Venezuela is missing a major source of export revenues," said Peter West, economist at Poalim Asset Management. "The more dire the situation gets, the more difficult it become to contain those pressures."

Since early December Venezuela has been crippled by a general strike which has severly limited everyday activity and virtually shut down the country's oil industry, the key to both its hard currency income and its tax receipts.

"With very little oil production, the government is in a huge fiscal bind which in turn creates depreciation pressures," added Rafael de la Fuente, emerging markets economist at BNP Paribas.

Even if the strikes were resolved soon, it would be some time before the return to normal levels of oil production fed though to the economy.

"The currency has only one way to go for now - down," added Mr de la Fuente.