Bloomberg News

Chile Prices to Rise Faster Than Market Expects, Araujo Says

October 26, 2011

(Adds comments from Araujo from third paragraph, inflation forwards in second paragraph.)

Oct. 26 (Bloomberg) -- Chile’s fixed-income market is pricing in too little inflation for next year, creating an opportunity for investors, according to Juan Pablo Araujo, who helps manage around $1 billion in fixed income at Larrain Vial Administradora General de Fondos SA.

Araujo expects prices to rise 3 percent next year, in line with the central bank’s target rate, he said at a conference in Vina del Mar, Chile. The forwards market for Chile’s inflation- linked accounting unit, the unidad de foment, was pricing in 2.48 percent inflation at yesterday’s close, according to Bloomberg calculations.

The Chilean peso may depreciate against the U.S. dollar as the central bank cuts interest rates and the price of copper, Chile’s main export, remains below $3.50 a pound, Araujo said. That will put pressure on the price of imported goods, while water shortages may increase electricity costs, he said.

“We have disagreed with the market since about August,” he said.

The one-year breakeven inflation rate, a measure of expected inflation priced into the interest-rate swaps market, rose seven basis points, or 0.07 percentage point, to 2.48 percent today. It fell from 3.06 percent at the end of July to 2.13 percent in August.

Falling Yields

Yields on inflation-linked bonds due in less than two years may fall to 2.07 percent from 2.19 percent, Araujo said, without giving a timeframe. Yields on bonds due in six to eight years may fall to 2.24 percent from 2.43 percent, he said.

Low unemployment and high levels of consumer spending will add to pressure on prices, Araujo said. Unemployment fell to 7.4 percent in the three months through August, and may have fallen to 7.3 percent in September, according to the median forecast of 13 economists in a Bloomberg survey. Retail sales expanded 8.5 percent year-on-year in September, according to the median estimate of 12 economists in a Bloomberg survey. The National Statistics Institute is due to publish the data on Oct. 28.

Larrain Vial SA, the fund manager’s parent company, expects inflation to slow to about 2.1 percent next year because of a global economic crisis, it said in a note to clients on Oct. 24.

“Our scenario of global deceleration will continue generating declines in prices of commodities, food and energy,” Larrain Vial’s research team, led by Dalibor Eterovic, wrote in the note.

--Editors: Philip Sanders, Glenn J. Kalinoski

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

To contact the editor responsible for this story: Philip Sanders at

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