Chile Central Bank Puts Spotlight on Peso While Holding Rate

Chilean policy makers highlighted the peso’s appreciation yesterday, fueling speculation the central bank will revive a dollar-buying program, while keeping the benchmark interest rate unchanged for a seventh month.

The policy board, led by bank President Rodrigo Vergara, held the key interest rate yesterday at 5 percent, as forecast by all 17 analysts polled by Bloomberg. Policy makers in a statement accompanying the decision said the peso had appreciated, making the first mention of the currency’s gain since its dollar-buying program ended in December last year.

The peso is the world’s best-performing currency tracked by Bloomberg this year behind Hungary’s forint and the fourth-most profitable bet for investors who borrow in dollars to invest in other currencies. While policy makers are unlikely to intervene in the peso at current levels, their statement may cause the currency to soften, analyst Sebastian Senzacqua said.

“It’s important to note that, unlike previous statements, the peso was mentioned and may be an area of attention for board members in coming months,” Bice Inversiones’ Senzacqua said by phone from Santiago. “The local currency has experienced a major appreciation compared to other currencies, which causes the market to speculate about intervention.”

Policy makers last intervened in the currency market in January 2011 when the peso reached 465.75 to the dollar, with the bank buying $50 million a day for 12 months. The peso depreciated by less than 0.1 percent to 483.82 per dollar at 9:17 a.m. Santiago time.

Dollar Purchases

In a trade-weighted and inflation-adjusted index, the peso has reached 72, according to Banco de Credito e Inversiones (BCI), compared with 73 before the previous intervention in January 2011.

Policy makers started mentioning the peso’s gains almost four months before initiating dollar purchases in a Sept. 16, 2010 statement accompanying the rate decision. They hadn’t mentioned the peso in a statement since Jan. 12 this year, when they said its depreciation in the fourth quarter was impacting inflation.

Intervening in the currency market may have little impact, as it wasn’t very successful in 2011, Deputy Finance Minister Julio Dittborn said in an interview yesterday.

Dollar Weakness

“What I’ve seen as a Chilean consumer is that the price of the dollar still goes down,” the University of Chicago-trained economist said from his offices in Santiago. Policy makers “should evaluate very carefully what happened in the last intervention.”

Other than making efforts to contain growth of public spending and promoting hedging, the government has limited tools to curb the peso’s rally, Dittborn said.

Asked about the peso during an economic forum in Santiago this month, central bank President Rodrigo Vergara kept open his options by saying his board can intervene when the exchange rate moves away from its fundamentals.

The central bank and government already are under pressure to take measures to soften the peso.

Chile’s fruit lobby, known as Fedefruta, has met with officials at the Economy Ministry as well as lawmakers and will set up meetings at the central bank to express its concern that the peso’s appreciation threatens to make exports of some fruits unprofitable, Fedefruta President Cristian Allendes said on Aug. 10.

‘Political Pressure’

The Santiago Chamber of Commerce in July urged the central bank to consider lowering borrowing costs, saying high local interest rates had attracted funds that were pushing up the peso, according to an e-mailed statement.

“We are going to suffer political pressures I think on this from fruit growers and exporters,” Dittborn said. “I don’t know if we’re able to resist those pressures. Probably the central bank is going to do something; if something happens, it’s going to come from the central bank in terms of rates or interventions in the foreign exchange market.”

Policy makers will reduce borrowing costs by February as inflation rates remain at or below the central bank’s 3 percent target for the next two years, according to the median estimate of 55 traders and investors polled by the bank on Aug. 7. Inflation has eased in the past five months, reaching 2.5 percent in July, the lowest level in 20 months.

One-year interest rate swaps, which reflect traders’ views of average borrowing costs, were unchanged at 4.96 percent as of 9:11 a.m.

Slowing inflation has been accompanied by robust economic growth in the world’s top copper producer as rising wages and falling unemployment push up consumer spending. Copper traded at $3.3930 a pound yesterday, down 2.1 percent this year.

‘Remain Vigilant’

The economy expanded 6.2 percent in June from last year after growing 5.3 percent in May and 4.8 percent in April. Wages increased 6 percent in June and unemployment dropped to 6.6 percent in the second quarter from 7.2 percent in the year-ago period.

Still, growth will moderate in the second half of 2012 as a global deceleration reduces demand for Chilean exports, with gross domestic product in the Andean nation expanding 4 percent to 5 percent this year, compared with 6 percent in 2011, according to central bank forecasts.

“There are major risks and we must remain vigilant,” Vergara said in the Aug. 7 economic forum. “The effects of the external environment on activity have been limited and less than expected. But it’s impossible for us to remain an island if the situation worsens.”

To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.

To contact the editor responsible for this story: Philip Sanders at psanders@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.