Chile’s central bank plans to support the national currency after it fell to a record low, spurring inflation that is already nearly four times the target.
On Thursday, politicians announced a $25 billion exchange rate intervention that will run from July 18 to September 30. This will include dollar spot sales of up to $10 billion and hedge sales of the same amount.
“With the global recession narrative starting to dominate the investment landscape, the Chilean central bank is looking to stop downward momentum in its currency,” said Todd Schubert, head of fixed-income research at Bank of Singapore. The fall in copper prices has led to a sharp devaluation of the peso, he said, and Chile is the world’s largest copper producer.
The Chilean peso fell to a record low of 1 060.40 per dollar as the US currency rose globally and after falling prices for the country’s top export copper. The peso has weakened nearly 19% this year.
The announcement of the plans came after Finance Minister Mario Marseille said the government was looking for ways to mitigate the impact of the weakening currency.
Policymakers continue to raise interest rates to fight annual inflation, which rose to an estimated 12.7% in June. A weak currency makes imported goods more expensive, increasing price pressure.
The political situation in the country is also taking its toll on the peso as Chile prepares for a September 4 referendum on a new constitution. Polls show that more voters are reluctant to pass the new document as a bill to reduce the legislature’s majority needed to reform the current charter moves through Congress.
The central bank has already introduced foreign exchange measures in 2019 when the peso plummeted due to street protests, and then again in 2020 at the start of the Covid-19 pandemic. The policy included selling dollars as well as currency swap programs.
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