Central Bank of Chile announces millionaire intervention before dollar advance

The Central Bank of Chile agreed to an intervention in the foreign exchange market for up to 25,000 million dollars to prevent possible distortions due to the galloping advance of the US currency in recent weeks.

In a statement released Thursday night, the agency said that in recent days the depreciation of the peso has occurred with an unusually high intensity and volatility, which puts pressure on the formation of prices in 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 institute said.

The announcement boosted the local currency, which on Friday morning gained 4.73%, falling from the barrier of 1,000 units per dollar, after the day before it closed with a 3.7% drop to the historical minimum of 1,045.80/1,046.10 units per dollar.

The global advance of the US currency since the beginning of June, together with a drop in the price of copper -Chile’s main export- and “local uncertainty” were the reasons for the agency’s advice to decide to intervene.

“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,” he added.

Between July 18 and September 30, a program of sales of dollars in the spot market will begin for up to 10,000 million dollars and 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 assured.

Additionally, to increase the provision of liquidity in dollars, it will offer a currency swap plan for up to 5,000 million dollars, complemented by a liquidity program in pesos in REPO operations.

“These exceptional measures are consistent with the monetary policy scheme, based on an inflation target and exchange rate flexibility,” he 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.

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