Bloomberg News

Chile Rate Swaps Fall After Central Bank Says It’s Ready to Act

September 29, 2011

Sept. 29 (Bloomberg) -- Chilean interest-rate swap rates tumbled after central bank officials said they were prepared to act “aggressively” to fend off an external crisis.

The one-year interest-rate swap fell seven basis points, or 0.07 percentage points, to 4.44 percent at 3:15 p.m. New York time. The six-month swap rate fell 10 basis points to 4.83 percent. The peso closed little changed at 512.78 per U.S. dollar, from 512.86 yesterday.

Central bank policy maker Rodrigo Vergara yesterday said the bank has “the tools, the will and the space to act.” His comments were echoed today by bank President Jose De Gregorio, who said policy makers’ base case scenario that rates would remain unchanged shouldn’t be interpreted as a commitment and that the bank was prepared to change rates at any time.

“They’re preparing the stage for a rate cut,” said Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago. “The market hadn’t been expecting that in October, but now it’s moving towards a 25 basis point cut, reaching 3.75 percent in June or July.”

On Sept. 26, swaps traders were discounting 25 basis-point rate cuts in December, January and February, with further quarter-point reductions in April and June, leaving the rate at 4 percent in a year’s time, according to Bloomberg calculations.

Today, the three-month rate at 5.11 percent suggests the market expects a 25 basis-point cut in November, the six-month rate at 4.83 percent suggests further quarter-point cuts in January, March and April. One-year swaps at 4.44 percent implies the central bank rate could reach 3.75 percent in July.

The peso, on course for its steepest monthly decline since 2008, may keep depreciating as fading global growth expectations weigh on prices for commodities, De Gregorio said today. Copper makes up more than half of Chile’s exports, so lower copper prices damage the country’s terms of trade and cheapen the peso.

‘Weaker World’

“Obviously with lower commodity prices in this weaker world, some depreciation of the peso is to be expected,” he said today.

Concern that the European debt crisis may trigger a global economic downturn sent copper for December delivery down as much as 5.1 percent today.

Inflation-linked swap rates also fell. The one-year swap rate in unidades de fomento, Chile’s inflation-linked accounting unit, dropped three basis points to 1.80 percent. One-year breakeven inflation slid 4 basis points to 2.59 percent.

Chile’s central bank paid a yield of 5.12 percent on a sale of 10-year bonds today, just three basis points more than the seven-year low 5.09 percent yield paid on Aug. 30. Demand for the bonds was the lowest since at least July 2004, with bids worth 161 percent of the total sold.

The bank sold five-year bonds at a yield of 4.93 percent, the lowest since May 2009. Banks bought 87 percent of the five- year bonds and 48 percent of the 10-year bonds.

Peso Forwards

Foreign investors in the Chilean-peso forwards market trimmed positions against the currency on Sept. 27 for the first time since Sept. 2. They reduced their net bet on the dollar to $4.8 billion from $5 billion on Sept. 26, according to central bank data published today.

Falling bond yields in Chile are evidence that the central bank’s change in bias at its Aug. 18 meeting has had an effect on rate expectations, De Gregorio said today. The bank dropped a phrase saying it expected further rate increases from its communiqué, which has already meant cheaper financing for Chileans, De Gregorio said today in Santiago.

--With assistance from Katia Porzecanski in New York. Editors: Brendan Walsh, James Attwood

To contact the reporter on this story: Sebastian Boyd in Santiago at

To contact the editor responsible for this story: David Papadopoulos at

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