Aug. 27 (Bloomberg) -- Venezuelan inflation will slow in the second half of 2008 after the government eliminated a tax on financial transactions and shortages of basic foods were alleviated, central bank director Armando Leon said.

The central bank and government have also restrained liquidity growth through bond sales, which will help slow price gains during the rest of the year, Leon said today during an interview with Bloomberg Television at his office in Caracas.

``The factors that contributed to the high inflation at the end of last year and early this year are gone,'' he said.

Venezuela, the fourth-biggest supplier of foreign crude oil to the U.S., is working to contain the region's highest inflation rate and maintain economic growth, which has averaged 11.24 percent a year since the end of 2003. The economy expanded 7.1 percent in the second quarter.

Leon said the economy will probably expand 6 percent to 7 percent both this year and in 2009, driven by consumer demand and construction, petrochemicals and infrastructure.

The central bank is seeking to keep inflation below 27 percent this year, a forecast made last week by Finance Minister Ali Rodriguez, Leon said. Even so, the central bank doesn't have any plans to raise interest rates, and it won't take steps to cause a ``violent'' drop in consumption, he said.

Leon said inflation this month may be slower than in July. Monthly price increases may stay below 2 percent for the rest of the year, he said.

Inflation Rate

Venezuelan consumer prices rose 22.5 percent in 2007. Annual inflation accelerated to 33.7 percent in July, according to the central bank.

Economists forecast annual inflation will remain above the central bank's target this year and next as a fixed exchange rate and price caps on some foods cause demand to exceed supply. In a Bloomberg survey this month, the median forecast from four economists was for consumer prices to rise 28.7 percent this year and 27.8 percent next year.

``As long as price and currency controls are maintained, there will be a gap in supply and demand and inflation will be a problem,'' said Miguel Carpio, an economist at Banco Federal CA in Caracas.

Bank lending, car sales and industrial production growth have all slowed this year, even as oil prices surged to a record.

A drop in investment in the first quarter, which led to a slowdown in growth, was caused by expectations that consumption in 2008 would be softer than last year, Leon said.

``No one thought consumer demand would be maintained,'' Leon said. ``There will be no contraction in consumer demand.''

Investment has since recovered in agriculture, textiles, transportation and infrastructure, Leon said.

Flush with foreign reserves, there are ``good conditions'' for a debt buyback, should the government decide to pursue one, Leon said. He didn't have any information on when or if the government would follow through with a plan to buy back some of its foreign debt this year.

To contact the reporter on this story: Jose Enrique Arrioja in New York at jarrioja@bloomberg.net; Jose Orozco in Caracas at jorozco8@bloomberg.net

Last Updated: August 27, 2008 17:28 EDT