Chile Central Bank Nods at Peso Rout in Verbal Intervention

Matthew Malinowski
·3 min read

(Bloomberg) -- Chile’s peso gained on Wednesday after the central bank said it will consider the currency’s “very important” depreciation at next week’s monetary policy meeting, in remarks interpreted as verbal intervention by analysts.

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After hitting a year-to-date low on Tuesday, the peso strengthened as much as 1.1%, before paring its gains. Two-year swap rates, a measure of interest rate expectations over that period, jumped to the highest since June.

The international outlook is complex and uncertainty is running high, Chile’s central bank wrote Tuesday night in an e-mailed response to questions from Bloomberg News. Global financial markets have reacted to factors including tight monetary policy in advanced economies and geopolitical tensions in the Middle East, prompting the dollar to strengthen and financial conditions to become more restrictive worldwide.

“The peso has seen a very important depreciation and long-term interest rates have risen,” the central bank wrote. “The impact on the economy’s development from the important depreciation of the peso, together with the rise in the price of some commodities like oil, will be analyzed in the framework of the monetary policy decision.”

Policymakers “constantly review the implications of these elements on the inflation projections and the convergence of inflation to target,” the central bank wrote.

The currency has tumbled nearly 13% in the past three months, the biggest rout among all currencies after Argentina. The exchange rate has weakened on factors including the Chilean central bank’s interest rate cuts, as well as chances of more monetary tightening in the US and growth concerns in China. The peso drop has pushed up the cost of imports, potentially firming inflation by year’s end.

Read more: Chilean Peso Jumps After Central Bank Verbal Intervention

The central bank’s comments likely will be interpreted as verbal intervention, Arturo Claro, an economist at Econsult in Santiago, posted on X, the social media platform formerly known as Twitter. The remarks also confirm the next borrowing cost reduction will be no more than 75 basis points, he wrote.

Resolving Imbalances

Central bankers lowered borrowing costs by 175 basis points in its past two meetings, to 9.5%, and have signaled more cuts will come. The next monetary policy decision will be on Oct. 26.

Annual inflation has eased steadily since hitting a three-decade high of 14.1% last year, and currently stands at 5.1%. Chile’s central bank targets cost-of-living increases at 3%.

Chile’s economy has been resolving its imbalances, and inflation has eased, the monetary authority wrote Tuesday.

Finance Minister Mario Marcel has played down the impact of the peso plunge on inflation, saying in a Bloomberg News interview last week that short-term currency weakness is unlikely to divert the central bank’s plans to cut rates.

Read more: Chile Finance Head Downplays Inflation Risks From Currency Slump

Economists in an October central bank survey see the peso strengthening to 900 in two months and 850 in 11 months.

In June, Chile’s central bank said it planned to boost its depleted foreign currency reserves by 25%, adding $10 billion to coffers through daily purchases of $40 million, which have subsequently weighed on the peso.

(Updates market move in second paragraph, and adds analyst comment starting in the seventh.)

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