SANTIAGO – The Chilean Central Bank announced on Thursday that it will intervene in the currency market by selling up to $20 billion in foreign currency instruments to try and halt the decline of the peso, which earlier in the day plummeted to a new historic low of 828.36 per US dollar due to the serious ongoing social crisis in the South American country.
“Aside from the level reached by the exchange rate, which to a great degree reflects greater uncertainty, the rapidity and continuance of (currency) movements in the same direction have created (exchange) volatility that is deemed to be excessive,” said the bank.
Thursday was the second consecutive day on which the Chilean peso hit a new low against the dollar. Chile’s currency has weakened 13 percent against the dollar over the past month.
The intervention will come via the sale of up to $10 billion on the spot foreign exchange market and up to a further $10 billion of “exchange hedging instruments” between December 2, 2019, and May 29, 2020.
The bank said that “the monetary effects of this measure will be sterilized, such that providing liquidity in pesos will be coherent with the monetary policy’s rate.”
“The sterilization will be implemented via the peso liquidity program announced on Nov. 14... lasting until May 29, 2020. Meanwhile, the dollar liquidity program will end on the same date,” the bank said.
Two weeks ago, the Central Bank announced a program to inject some $4 billion into the economy through short-term currency exchange swaps and repo programs, a measure that many analysts called “too weak” a move and one that would not halt the peso’s precipitous decline.
Before the start of the recent social crisis, the lowest value ever attained by the Chilean currency came in October 2002, when it was quoted at 761 pesos to the dollar.
“The Central Bank Advisory Board reiterates that it will continue using all the tools at its disposal to achieve the objectives set for it by law, in particular to maintain the normal functioning of internal and external payments, and for inflation to remain at the goal of 3 percent for a two-year political horizon,” the bank added.
The massive anti-government street protests amid the social crisis, which has resulted in at least 23 deaths and thousands of people injured, have been under way for the past six weeks with no signs of any resolution in the short term.
In addition to the cratering of the peso, the protests have had a serious impact on trade and tourism to the point where the Central Bank lowered its domestic growth forecast for 2019 from 2.5 percent to 1.9 percent.
The Chilean government estimates that up to 300,000 jobs could be lost amid the turmoil by the end of this year, a situation that would hike the unemployment rate from 7 percent to 10 percent.
Meanwhile, the currencies of Colombia and Brazil also hit historic lows against the dollar this week due to political instability, pending reforms, popular demands for greater social equity and growing uncertainty over the US-China trade war.