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Chile Currency Plunges As Inflation Shakes Things Up

The financial and economic systems of Chile are under a great deal of pressure, as the Andean copper giant is dealing with runaway inflation and a tumbling currency. This has put a wrench in the plans of President Gabriel Boric to introduce a tax reform bill aimed at funding ambitious social programs.

Chilean peso

There was a 15% plunge in the price of the Chilean peso in the last month alone, as it briefly reached a value of 1,000 pesos against the dollar. This sent alarms up in the country and June saw the yearly inflation in Chile reach a whopping 12.5%, which is the highest number recorded in over thirty years.

Mario Marcel, the country’s Finance Minister, said that they had a free-floating exchange rate and they opted to be market-oriented, which means that the currency tends to be quite volatile. However, he asserted that this does not really reflect the wider range of problems.

Marcel stated that a floating exchange rate made Chile’s currency more volatile than the other Latin American countries, but he said that the primary difference was that their economy is not a dollarized one. Thus, he said that volatility in the exchange rate did not create problems of financial stability in the country in the same way as in other regions.

Chile’s central bank

Other than the Finance Minister, the central bank in Chile also made attempts to assuage the worries about a weakening peso. The central bank asserted that a declining peso did not really pose a significant threat to the financial system.

On Monday, the bank issued a statement in which it asserted that markets had been able to absorb the shocks in the right way for now and also added that it was keeping an eye on any future fluctuations.

Recession risks

There is a risk of an economic recession globally and the price of copper has come down sharply from its recent highs over worries of slowing Chinese demand. Chile is the world’s top producer of red metal and this could be a big concern for the country.

Moreover, the Russian conflict with Ukraine has also fueled worries about the global supplies of both energy and grains, which has driven up inflation that seems to be rattling countries all over the world. This is because the rising prices of food and gas are hurting customers and leading to unrest.

According to the Chilean finance minister, a subsidy is being offered by the government to low-income families in order to soften the blow of increasing prices. This is meant to stabilize the prices of basic goods and fuel.

Marcel said that they were trying to use mechanisms for stabilizing prices. He said that they had been able to provide a better cushion to people as opposed to other countries that have simply chosen to eliminate taxes.

This economic turmoil comes in the country at a time when the government was working on a tax reform bill that is aimed at eliminating tax loopholes and imposing taxes on high earners.

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