MercoPress. South Atlantic News Agency

Chile injects US$ 25 billion liquidity to contain the exchange rate and inflation

Chile is undergoing deep political uncertainty with a novice government, and a constitutional assembly drafting a new document, which must undergo an approval referendum

After the US dollar in Chile broke the milestone exchange rate of a thousand Pesos in June, the Central Bank reacted by announcing it will literally “flood” the market with 25bn dollars, of which 10bn to be supplied to the spot market, another 10bn covering future dollar operations, and 5bn in swap deals.

To this must be added the decision of the Central Bank Monetary Council to increase the Monetary Policy Rate by 75 basis points to 9,75%, the highest since 2021, and the ninth increase since July 2021.

Chile as most countries in the world is suffering from a spike in inflation, because of the aftermath of the Covid 19 pandemic and the war in Ukraine, which has ballooned commodity prices particularly for food and energy.

Twelve month Inflation in June reached 12,5% the highest since June 1994, and the government has decided on a winter support bonus of some US$ 120 to be distributed among the most vulnerable population.

Chile is also undergoing deep political uncertainty with a novice government, and a constitutional assembly reviewing and drafting a new document, which must undergo an approval referendum. However public opinion polls indicate that the Reject option is the strongest and keeps advancing. If this happens it will further debilitate a weak government which lacks a majority in congress.

No wonder then that Chile, once the wonder case of South America for political stability and economic reliability is in trouble with the Peso having lost 17% of its value against the dollar in June.

Furthermore, copper of which Chile's is the world's main producer and exporter, has seen its international price drop almost 30%, another non encouraging situation.

Although the fundamentals of the Chilean economy remain strong, many challenges lie ahead, mainly political with an impact in the economy.

The 25bn liquidity injection becomes effective Monday 18th July until the end of September, and should help continue to calm the market, since the mere announcement last week of the measures helped the Peso appreciate to 930 (from 1,000) to the US dollar, and end the week-s trading at 970 Pesos.

But in the last week of July there is scheduled a two day meeting of the Federal Reserve, which has anticipated that the basis rate could again be increased by another 75 basis points, or even more given the 9.1% twelve month inflation in June. Actually the Fed's 15 June 75 basis point increase triggered the Chilean situation.