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Chile’s central bank has announced plans to back the country’s currency after it fell to a record high, fueling inflation that has already nearly quadrupled the target rate.
Policymakers announced Thursday night a $25 billion financial intervention, adding that it will last from July 18 to Sept. 30. The program includes dollar money sales of up to $10 billion and currency hedging sales of up to the same amount, they said in a statement. .
“With the global recession narrative beginning to dominate the investment landscape, Chile’s central bank must avoid the downward trend of its currency,” said Todd Schubert, head of constant revenue source studies at the Bank of Singapore. Falling copper costs have led to a sharp devaluation of the peso, with Chile being the world’s largest copper producer, he said.
The Chilean peso fell to a record 1,060. 40 per dollar on Thursday as the U. S. currency appreciated globally and after the value of copper, the country’s main export, fell. The peso has now weakened by nearly 19% this year.
Aggressive walks
Policymakers have already prolonged competitive interest rate hikes in a bid to rein in annual inflation, which jumped to 12. 5% in June. A weaker currency makes imported goods more expensive, increasing value pressures.
Political uncertainty is also weighing on the peso as Chile approaches a Sept. 4 referendum on a draft new constitution. Polls show that more voters are likely to reject the draft document as a bill that reduces legislative majorities to reform the existing charter that is making its way through Congress. .
“This is a welcome development, especially if combined with a decisive traditional financial policy strategy,” Alberto Ramos, lead Latin America economist at Goldman Sachs Group Inc. , said of the intervention in a study note. “However, there are limits to what the central bank can achieve given the complicated internal and external context and given the limited amount of foreign exchange reserves. “
The central bank had already implemented financial measures in 2019 when the peso collapsed amid large street protests, and then in 2020 at the beginning of the Covid-19 pandemic. The policies included dollar sales as well as currency exchange programs.
(Updated with observation by Goldman Sachs)
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