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Chile rocked by currency plunge, inflation

Chile’s tumbling currency and runaway inflation are testing the Andean copper giant’s economic and financial systems, and complicating President Gabriel Boric’s plans to push through a tax reform bill to fund ambitious social programs.

The Chilean peso has plummeted more than 15 per cent over the last month, briefly hitting 1000 pesos per US dollar for the first time ever, sparking alarms.

Yearly inflation hit 12.5 per cent in June, its highest in nearly three decades.

Finance Minister Mario Marcel said the country’s market-oriented model and free-floating exchange rate meant that while the currency could be more volatile, this did not necessarily reflect wider strains.

“Because (Chile) has a floating exchange rate, it is more volatile than other Latin American countries, but the difference is that we have an economy that is not dollarised,” Marcel told Reuters.

“Therefore exchange rate volatility does not generate risks for financial stability as can happen in other countries.”

Chile’s central bank also sought to calm fears over a weaker peso, saying it does not pose a significant harm to the financial system.

“Our evaluation indicates that up until now, markets have been able to absorb shocks appropriately,” the bank said in a statement issued later on Monday, adding that it will monitor any further fluctuations.

The global economy is facing a rising risk of recession, with concerns over slowing demand from China pulling the global price of copper back sharply from recent highs.

Chile is the world’s number one producer of the red metal.

Russia’s invasion of Ukraine has also raised fears over the global supply of grains and energy, pushing up inflation that is rattling countries around the world as rising food and gas prices hurt consumers and stoke unrest.

Marcel said that to soften the blow to citizens from rising prices, the government is providing a subsidy for low-income families and stabilising prices for fuel and basic goods.

“What we are doing is using the mechanisms we have to stabilise some prices, so we have a fuel price stabilisation mechanism,” Marcel said.

“We have been able to cushion more than countries that have simply eliminated specific taxes.”

The economic turmoil comes as the government is trying to push through a tax reform bill that seeks to collect 4.1 points of GDP over four years by implementing tax hikes on top earners and a mining royalty, as well as eliminating tax loopholes.

Young, progressive President Boric said the plummeting currency was “tremendously worrying” during a press conference last week, attributing the decline to weakening copper prices, as well as uncertainty over a planned new constitution.

“Uncertainty, without a doubt, plays a role and that’s why it’s important that all the different political actors give signals that promote certainty,” Boric told reporters.

Chileans will vote in September to approve or reject a new constitution, which focuses on social rights and the environment.

It would replace the current market-led text that dates back decades to the Augusto Pinochet dictatorship. Opinion polls currently suggest it lacks enough support to pass.

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