Chile cbank warns intervention 'addiction' dangerous

SANTIAGO Sun Jan 10, 2010 11:05am EST

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SANTIAGO Jan 10 (Reuters) - Chile's flexible exchange rate has helped the country cope with the global financial crisis, and any attempt to fix it is "extremely dangerous," Chile's Central Bank President Jose De Gregorio said in an interview published on Sunday.

De Gregorio told daily El Mercurio's Sunday edition that "addiction" to intervention was also dangerous. His comments contrast with repeated verbal intervention warnings in recent months amid a sharp appreciation of the local peso CLP=CL, which is near 18-month highs on dollar sales and high prices of No. 1 export, copper.

Chile's peso appreciated 26 percent against the dollar in 2009, after a 22.3 percent depreciation in 2008, and the central bank had warned repeatedly it reserved the right to intervene in exceptional circumstances.

"Often there is temptation to try to fix the exchange rate, and that is an extremely dangerous path," De Gregorio told the paper.

"The worst risk is what I call intervention addiction," he added. "In the end, they are ineffective and the first step towards rigidities, and are very harmful in the medium term."

The last time the central bank intervened in the foreign exchange market was in 2008, when the peso hit levels of 430 per dollar. It intervened through a program of dollar purchases to boost international reserves and weaken the peso.

De Gregorio warned as recently as mid-December that the bank was closely monitoring the peso and did not rule out intervening if it saw significant imbalances. (Reporting by Rodrigo Martinez; Writing by Simon Gardner; Editing by Maureen Bavdek)

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