Chile’s Peso Slumps as Central Bank Dallies

The Chilean peso suffered heavy losses last week, slumping to a record low as the country’s central bank delivered an underwhelming interest rate hike that disappointed the markets.

The peso plummeted by almost 5% to an unprecedented 1,060.40 per US dollar, in the process registering its single worst day performance since 1989. 

Chile’s central bank nudged its interest rate up by 75 basis points to 9.75% last Wednesday, meeting the forecast of a minority of economists, but disappointing the markets, which were pricing in a steeper hike. 

Before the decision, the markets expected more than a full percentage point hike, as the peso’s steep selloff during the past month led investors to expect a bolder response from policy makers.

Chile’s central bank has lifted interest rates by 9.25 percentage points over the past year. However, inflation has shown no signs of slowing, reaching its fastest pace since 1994.

What does this mean for me? 

The peso is down almost 18% against the dollar over the past month and more than 20% since June. This has prompted economists to call for borrowing costs to be raised to levels high enough to slow prices, reduce a currency selloff, and prevent a full-blown peso crisis.

So far, Chile’s central bank has shown little willingness to intervene in the foreign exchange market despite a rapidly declining peso. As a FOREX trader, you should know that this minor currency could be set for further losses if conditions remain unchanged.