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Chile Not Planning Capital Controls to Weaken Peso

Timothy Geithner listens to Felipe Larrain
Timothy Geithner, U.S. treasury secretary, listens to Felipe Larrain, finance minister of Chile, during a meeting with Latin America regional finance ministers. Photographer: Andrew Harrer/Bloomberg

Chile has no plans to implement capital controls to curb gains by the peso, which has strengthened more than any Latin American currency in the past three months, Finance Minister Felipe Larrain said.

Larrain, in an interview, said Chile has had “mixed” results when in the 1990s it used capital controls to stem the appreciation of the peso. He said that curbing public spending growth is “one of the best ways” to prevent the currency from further strengthening against the dollar.

“Capital is very smart,” said Larrain, who is in Washington to participate in the annual meeting of the International Monetary Fund. “You can say this short-term capital I don’t want, so they disguise it as long-term capital and they are really playing with the interest rate differential.”

Governments in Latin America are taking steps to curb currency gains as policy makers at the IMF debate ways to prevent a “currency war” to boost exports through weaker exchange rates. Brazil on Oct. 4 doubled the tax on foreigners’ purchases of fixed-income assets to 4 percent to stamp out a rally that pushed the real to a two-year high this week. Central bankers in Colombia and Costa Rica last month initiated programs to buy dollars to curb currency gains.

Chile’s peso, which has strengthened 11.5 percent against the U.S. dollar in the past three months, is along with Brazil’s real the currency with the strongest case for government action, Bank of America said in a report today. The currency rose 0.3 percent today to 482.08 per U.S. dollar.

‘Best We Can’

The government is “doing the best we can” to cope with the peso’s gains, said Larrain. “We are not alone in this. The dollar is weakening against the currencies of all emerging markets.”

Steps the government has taken to ease pressure on the peso include curbing the rate of public spending growth, Larrain said today. The government is also resisting the urge to further tap $12.5 billion in foreign-held reserves to rebuild from an 8.8-magnitude earthquake in February that killed more than 500 people and may have caused $30 billion in damage, Larrain said in a special session of Congress Oct. 6 to discuss the peso’s gains.

“If someone has a clever idea I urge them to communicate it,” Larrain said today when asked about strategies to ease the currency’s gains. “We can always do more and we are thinking of ways that are efficient.”

Central Bank Action

Central bank President Jose De Gregorio, who also participated in the special congressional session, said policy makers have discussed the possibility of resuming dollar purchases in the local currency market for the first time since 2008.

“There is a role for the government and a role for the central bank,” Larrain said today.

Chile’s $164 billion economy grew 6.5 percent in the three months through June from the same period of 2009 and could have exceeded 7 percent growth in the third quarter, according to Larrain.

The central bank probably will slow the pace of rate increases next week to help prevent further appreciation of the peso before deciding whether to intervene in the currency market, Bank of America said in today’s report.

“We find the case for foreign exchange intervention strongest in Brazil and Chile,” Latin American strategists David Beker and Alberto Boquin said in the report.

Chile’s central bank is expected to increase its benchmark interest rate 50 basis points for a fifth straight meeting next week, to 3 percent, according to six of 11 analysts in a Bloomberg survey. The remaining five analysts expect a smaller 25 basis point increase to 2.75 percent.

Larrain, 52, received his undergraduate degree in business administration from Chile’s Catholic University and his doctorate in economics from Harvard University. He has published 10 books, including “Macroeconomics in the Global Economy,” co-authored by Columbia University economist Jeffrey Sachs.

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