Chile’s central bank to intervene with up to US$25 billion to stop the fall of the peso

RIO DE JANEIRO, BRAZIL – The Central Bank of Chile announced Thursday an intervention in the foreign exchange market with an amount of up to 25 billion dollars to try to stop the fall of the peso, which closed yesterday above the psychological limit of 1,000 units per dollar.

“To facilitate the adjustment of the Chilean economy to the uncertain and changing domestic and foreign conditions, the Central Bank’s Executive Board has decided to implement a program of foreign exchange intervention and preventive provision of dollar liquidity of up to US$25 billion,” the central bank said in a statement.

The intervention will be carried out through the sale of spot dollars in the amount of up to US$10 billion, the deal of currency hedging instruments in the amount of up to US$10 billion, and a currency swap program in the amount of up to US$5 billion from July 18 to September 30, 2022.

In recent days, the issuer said, “the depreciation of the peso has occurred with unusually high intensity and volatility, which has weighed on pricing in the foreign exchange market.”

“The persistence of this scenario increases the likelihood of significant distortions in the functioning of the financial market in general,” the institution added in a statement.

The bank’s intervention, expected by the markets, came on the same day that the dollar hit a record high of 1,051 pesos per unit and a day after the issuer raised benchmark interest rates 75 points to 9.75 percent to curb inflation.

Experts blame the rise in the U.S. currency on its global appreciation and the drop in the value of copper, which Chile exports as the world’s leading exporter.

“Since the beginning of June, the U.S. dollar has appreciated by almost 7%, and the price of copper has fallen by about 30%,” the bank said.

Chile’s economy grew by a historic 11.7 percent in 2021, after slumping 5.8 percent in 2020 due to the pandemic, and posted cumulative inflation of 7.2 percent, the highest in 14 years.

In May, the Chilean government lowered its 2022 growth forecast to 1.5 percent from 3.5 percent and raised its 12-month cumulative year-end inflation estimate to 8.9 percent.

The Central Bank had not intervened on this scale since March 2020-November 2019 (US$20 billion), when the peso reached 828.36 units per dollar and the country was in the midst of the biggest social crisis in its recent history, with protests claiming at least 30 lives.

With information from EFE