The Constitutional Organic Law (LOC) of the Central Bank of Chile (BCCh) establishes that its objective is to safeguard currency stability and the normal functioning of internal and external payments. To this end, the Bank has authority over monetary and foreign exchange matters, including the regulation of liquidity, the conduct of foreign exchange operations, and the issuance of regulations in these areas.

Additionally, the regulatory framework authorizes the Bank to hold and manage international reserves domestically or abroad, in assets such as foreign currencies, gold, and other financial instruments issued or guaranteed by sovereign entities or international financial institutions. These reserves constitute the primary source of external liquidity of the Central Bank, which may be supplemented by access to additional sources of liquidity for precautionary purposes.

Within the scope of these responsibilities, the Bank operates under an inflation-targeting framework supplemented by a floating exchange rate regime, in which the value of the currency is determined by the market. In this context, reserves play a supporting role in helping the Bank achieve its objectives by providing quick and secure access to foreign currency liquidity in exceptional and specific situations, such as when special measures must be implemented to ensure proper price formation in the foreign exchange market.

Since the law defines the Bank’s mandate in general terms, the strategic framework for reserve management, including investment guidelines and the acceptable level of risk, it is determined by the Board of the Bank. To this end, the Board approves an Investment Policy that defines the portfolio structure, eligible assets and currencies, as well as the limits and risk criteria necessary to ensure management consistent with the Bank’s objectives and with the principles of reserve management, namely: liquidity, capital preservation, and return.

The following figures schematically show the current composition of the reserves.

International reserves are divided into three main portfolios: investment, cash, and other assets. The investment portfolio primarily comprises international fixed-income instruments issued by governments with high credit quality (A- on average or better). This portfolio is associated with a benchmark (Figure 2), which guides investments in terms of currencies, instruments, issuers, and maturities.

The benchmark structure of the investment portfolio, which is divided into a liquidity portfolio (50%) and a diversification portfolio (50%), consists entirely of sovereign debt instruments with an average duration of approximately 1.9 years, with 14% of inflation-linked instruments. In terms of country allocation, 64% corresponds to debt issued by the United States, 13% by Germany, 8% by Canada, 6% by Australia, 3% by the United Kingdom, 3% by South Korea, and 3% by the People’s Republic of China. The dominant credit rating of the benchmark portfolio is AA+.

The other assets portfolio records investments in gold and positions held by the BCCh in the International Monetary Fund (Special Drawing Rights – SDR). Lastly, the cash portfolio corresponds to balances denominated in U.S. dollars held mainly by banking institutions at the BCCh.

Figure 3 shows the effective currency composition of the total international reserves portfolio. This information is available in the BCCh Statistical Database..

Figure 3: Currency composition of total international reserves (millions of dollars)

The management of international reserves includes a program of external asset managers, who are entrusted with managing a government fixed-income portfolio with a structure equivalent to that managed internally. This program acts as an active benchmark for the Bank’s internal management and facilitates knowledge transfer as well as the generation of economic value. Currently, there are two external managers, managing approximately 3% of the investment portfolio.