MercoPress. South Atlantic News Agency

Chilean central bank allowed to buy treasury bonds, as “a tool of exceptional use”

The Chilean central bank has forecast that the economy would contract between 5.5% and 7.5% this year, which would be the deepest decline in 35 years.

Chile’s Congress has approved a law to allow the central bank to buy bonds issued by the country’s treasury in the secondary market, potentially giving the bank added firepower to help offset fallout from the COVID-19 crisis.

Finance minister Ignacio Briones said in a statement that the measure was a “tool of exceptional use” that would help ensure the country was better placed to withstand future financial shocks.

The move represents a shift for Chile. The central bank previously was prohibited from acquiring debt issued by any state organization or from financing public spending through direct or indirect credit

Chile, the world’s top copper producer, has been hit hard by the pandemic. The central bank has forecast that the economy would contract between 5.5% and 7.5% this year, which would be the deepest decline in 35 years.

The finance ministry said in a statement that any bond purchase had to be approved by four out of five of the central bank’s directors, and the bonds would be resold by the bank in the open market once the “extraordinary circumstances” passed.

“In no case may debt securities issued by the Treasury, state agencies or companies be acquired in the primary market,” it said.

It also highlighted that central banks in developed economies habitually buy and sell Treasury debt instruments in the secondary market as part of their core mandate, using the tool to influence long-term interest rates through unconventional policies.

In related news the central bank released data saying that market analysts predict the economy of Chile to decline 6% in the current year 2020, which is slightly less than the estimate made in July of 6.1%.

According to experts, an economic expansion of 4.5% is predicted for 2021, unchanged from the earlier predictions, as a growth of 3.2% is estimated for 2022.

July is predicted to witness an economic decline of 12% following the 12.4% drop reported in June. A 9% drop in expected for the economy in the third quarter of the current year, less than the 10% decline estimated earlier.