By Nathan Gill and Sebastian Boyd

     Oct. 6 (Bloomberg) — Chile’s Finance Ministry deposited $1.05 billion in local banks last week, Minister Andres Velasco told reporters today.

     The ministry was taking advantage of interest rates offered locally, Velasco said. Chilean banks raised interest rates on term deposits as they sought to overcome a shortage of liquidity in dollars.

     Latin American central banks have pumped liquidity into interbank markets as the U.S. credit freeze spread and the counterparties that usually provide foreign currency financing failed, were bought or cut off funding. The central bank canceled daily purchases of $50 million of dollars and instead plans to offer $2 billion of dollar liquidity in four weekly auctions.

     “The Treasury keeps the funds deposited in banks, not underneath the mattress,” Velasco said. “Last week, we saw that rates in Chile were somewhat higher than abroad. Taking advantage of the fact that some deposits abroad came due, we made deposits, as we do routinely, in some of the principal banks in the country.”

     The short-term dollar lending rate in Chile more than doubled to 9.60 percent today from 4.64 percent a week ago, according to data compiled by Bloomberg. Interest paid on 90-day peso deposits rose to 1.18 percent on Oct. 3 from 0.79 percent on Sept. 29, according to data compiled by Bloomberg.

     La Tercera reported the Finance Ministry’s actions on Oct. 4, citing unidentified banking industry officials.