Chile's De Gregorio Sees Currency's Appreciation Reflects Economic Growth
Chile’s central bank would only intervene in the currency market if the exchange rate was out of line with the economy, bank President Jose De Gregorio said.
The real exchange rate “is still within ranges that are not abnormal,” De Gregorio said today in Santiago. While the bank doesn’t rule out intervention, it would only do so if the benefits outweighed costs, he said.
The Chilean currency is the fastest rising among 26 emerging-market currencies tracked by Bloomberg this month, strengthening 3.3 percent. The peso’s appreciation reflects the economy’s “vigorous” recovery from last year’s slump and February’s earthquake and the expectation of future interest- rate rises, De Gregorio said.
“We try to be extremely flexible but we take pretty seriously the idea that exchange-rate intervention is very exceptional,” he said. The peso’s appreciation “has to do with the strength of the Chilean economy.”
The peso traded at 504.45 per U.S. dollar at 1:29 p.m. New York time, little changed from 504.69 yesterday. It weakened as much as 0.8 percent before De Gregorio’s speech.
The central bank president, who spoke at a meeting of exporters, defended Chile’s exchange-rate policy, saying that the widespread adoption of floating currencies had helped mitigate the effects of the global economic downturn following the collapse of Lehman Brothers Holdings Inc. The central bank’s policy allows it to intervene in the peso when its value doesn’t reflect what is going on in the economy, he said.
“Trying to influence a price that is reasonable is much harder than when it is out of line,” said De Gregorio. “We have had successful interventions precisely because the currency has been out of line.”
The peso dropped the most in seven weeks on Aug. 19 after Finance Minister Felipe Larrain raised the possibility that the bank might act to curb the currency’s rise. Intervention was “undoubtedly a possibility,” Larrain, a former economics professor, said in a radio interview.
Monetary authorities will consider the exchange rate as they continue to increase borrowing costs, De Gregorio said. The central bank raised its benchmark interest rate to 2 percent this month from a record low of 0.5 percent in June.
Chilean interest rates aren’t high enough to justify a carry trade, when investors borrow in a currency with low interest rates to invest in a currency with higher yields, the central bank President said.
“Chile isn’t a country that has rates way out of line with the rest of the world,” he said. “They’re not differentials that are going to offer a surefire return.”
A delegation from the National Agricultural Society yesterday visited the central bank to push for intervention, saying that the strength of the peso had cut profits for farmers.
“There has been a systemic rise in the national currency recently, which makes exporting harder, so people are discussing intervention to limit the damage to the exporting sector,” Cristobal Doberti, an economist at Bice Inversiones said today. “In fact the central bank only intervenes when the exchange rate is out of line with fundamentals, which isn’t the case today.”
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