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Larrain Says Working With Central Bank to Cool Chilean Peso

Larrain Says Working With Central Bank to Cool Chilean Peso
Felipe Larrain, 54, has an undergraduate degree from Santiago-based Pontificia Universidad Catolica de Chile and a doctorate in economics from Harvard University in Cambridge, Massachusetts. Photographer: Simon Dawson/Bloomberg

Chile’s Finance Minister Felipe Larrain indicated that authorities are relying on fiscal restraint to slow an appreciation in the peso, as it coordinates actions with the central bank.

“We shouldn’t be igniting the forces of appreciation,” he said in an interview at the London Stock Exchange. “On the contrary, by doing responsible fiscal policy -- which we have been doing the last couple of years -- we help to reduce the appreciation forces.”

Chile’s government will propose a real spending increase for 2013 of about 5 percent, which is in line with estimates for economic growth, President Sebastian Pinera said in images transmitted on state-owned television yesterday. Public spending expanded 3.3 percent in 2011 while expenditures will grow 6.4 percent in 2012, according to the Budget Office.

The government has resisted pressure from student leaders like Camila Vallejo to raise spending further to provide university education free of charge. Students have led more than 14 months of protests over the issue, driving down Pinera’s approval rating to 27 percent in August, according to Santiago-based polling company CEP.

Public spending increased at a faster pace during the previous administration of Michelle Bachelet, who left office with a 78 percent approval rating -- the highest of any president since Chile’s return to democracy in 1990, according to CEP. Public expenditures grew 8.2 percent in 2008 and 17 percent in 2009 during her last full year as president, according to the Budget Office.

‘Responsible Fiscal Policy’

“Our job is to make the central bank’s job easier by doing responsible fiscal policy and increasing government spending at a level that doesn’t push up interest rates,” said Larrain, who is in London to promote investment in Chile. “If you push up interest rates, then you bring capital inflows to the country, and that appreciates the peso.”

Chile’s peso gained 0.1 percent to 474.84 per U.S. dollar at 11:59 a.m. local time. The peso is the best performer against the dollar among the world currencies tracked by Bloomberg so far this year after the Hungarian forint.

Twice in the past five years the central bank undertook programs to buy dollars after coming under pressure from politicians and exporters to slow the appreciation of the peso. Speculation that the bank would intervene again increased last month after the real exchange rate, which is adjusted for inflation, reached the strongest level since December 2010, one month before the bank started buying dollars.

Significant Reserves

Central bank President Rodrigo Vergara last week told reporters in Santiago conditions didn’t yet exist to intervene in the peso, adding that there’s less justification now than in 2011 to increase international reserves. Pinera said in a Sept. 10 interview in Russia the peso wasn’t hurting exports in general.

Larrain didn’t say today whether policy makers need to buy dollars, adding that he respects the bank’s autonomy to make decisions. The central bank has “very significant” reserves of almost $40 billion and the government holds more than $30 billion in foreign assets that will gives it a “strong” position as the world economy decelerates, he said.

Gross domestic product in the Andean nation will expand closer to 5 percent this year than the official forecast of 4.7 percent growth made in July, Larrain said. The International Monetary Fund today forecast Chile’s economy would grow 4.75 percent in 2012, “broadly in line with potential growth,” the Washington-based lender said in an e-mailed report.

Growth Forecast

GDP increased 5.4 percent in the first half of 2012 from the same period last year, prompting the central bank this month to raise its growth forecast to a range of 4.75 percent to 5.25 percent from its June estimate of 4 percent to 5 percent.

“Our economy will keep growing, will keep generating jobs as it has done this year, in the face of a very complicated international situation,” Larrain said, declining to provide a forecast for 2013 growth.

Larrain, 54, has an undergraduate degree from Santiago-based Pontificia Universidad Catolica de Chile and a doctorate in economics from Harvard University in Cambridge, Massachusetts. President Pinera and central bank President Vergara also studied economics at Harvard.

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