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From: The Black Swan 1/5/2011 9:14:28 AM
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Chile Central Bank Dollar Buying to Have Costs, De Gregorio Says
By Sebastian Boyd -
Chilean central bank President Jose De Gregorio comments on the bank’s plan to buy $12 billion of U.S. dollars to weaken Latin America’s best-performing currency last year.
De Gregorio spoke to reporters today in Santiago.
On the cost of the operation:
“It depends how yields move, but the carry cost of this operation could be approximately 3 points. However, we have a capital gain because the value at which we are buying is cheap, but we have to see at the end how much we won or lost from the operation. These measures aren’t free.”
On the reasons for the decision:
“It would seem appropriate to take this measure because it makes a contribution to the economy of the country.”
“We don’t determine intervention by the level of the exchange rate. It has much more to do with perspectives for the Chilean economy. What we do see, much more strongly than we did then, is that this situation of probable long-term decline in the exchange rate could be more lasting and that has costs that we are trying to partially mitigate.”
On the impact on the Chilean peso:
“We’re not going to change the long-term tendency of the currency, but it will have a transitory effect for a reasonable period.”
“It won’t affect the long-term competitiveness of the Chilean economy and it won’t change its real long-term exchange rate. But it will provide, from the point of view of productive sectors of the country, a bit of help so they can make the adjustments necessary to live in this world which entered a very serious, complicated period in 2008, from which it still hasn’t exited.”
On the monetary-policy implications:
“What we’re doing with this measure, to a certain extent, achieves a better balance between interest rates and the exchange rate. And we think that’s a positive contribution to the national economy, and that isn’t free.”
“Because of the way we handle the intervention we’ll be able to manage monetary policy completely coherently with our inflation target.”
On the impact of bond sales on yields:
“Intervention isn’t free. Intervention, beyond the financial costs for the central bank, has costs for the country.
“When you issue pesos to buy dollars you have to withdraw them by selling debt. That pushes rates up because people say they’ll take the central bank debt, but if it pays a bit more yield.”
On the price of copper and its impact on the peso:
“People think that copper gains and we are flooded with dollars. That doesn’t happen. Half of that income is for foreign companies that don’t want to come and spend it here. The rest is a fiscal policy that isn’t based on the current price of copper, but on the long-term price. It has an exchange-rate impact, but not because we’re being flooded with dollars.”
To contact the reporter responsible on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net
To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net
bloomberg.com
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