Santiago July 15 2022: Chile’s central bank agreed to a $25 billion intervention in the foreign exchange market due to the galloping advance of the U.S. dollar in recent weeks.
In a statement released Thursday night, the bank said the peso has depreciated with unusually high intensity and volatility over the last few days, putting pressure on the prices of the foreign exchange market.
“The persistence of this scenario raises the probability that significant distortions will be generated in the functioning of the financial market in general,” the statement said.
The announcement boosted the local currency, which gained 4.73% on Friday morning, dropping below 1,000 units per dollar. The previous day it closed with a drop of 3.7% to the minimum historical 1,045.80/1,046.10 units per dollar.
The bank said it decided to intervene due to the U.S. dollar’s strong global advance since June, the drop in the price of copper, Chile’s main export, and “local uncertainty.”
“This is a welcome development, particularly if combined with a decisive conventional monetary policy strategy,” Alberto Ramos, an economist at Goldman Sachs, said in a report.
“However, there are limits to what the central bank can achieve given the very challenging domestic and external context and when taking into account the limited amount of foreign exchange reserves.”
The bank announced a $10 billion sales program on the spot market from July 18 to July 30 and the sale of foreign exchange hedging instruments for the same amount.
“The monetary effects in local currency of the operations of this intervention will be duly sterilized, so that the provision of liquidity in pesos is consistent with the monetary policy rate,” the bank said.
Additionally, to increase the provision of liquidity in dollars, it will offer a currency swap plan for up to $5 billion, complemented by a liquidity program in pesos.
“These exceptional measures are consistent with the monetary policy scheme, based on an inflation target and exchange rate flexibility,” the statement said.
Earlier in the week, the bank had said that the current deterioration of the local currency has not significantly affected the financial system, although it said it would continue to assess the situation in order to act if necessary.
On Thursday, the Chilean peso closed down 3.7% at a record low of 1,045.80/1,046.10 per dollar.
