Bloomberg News

Chile Swap Rates Surge as Inflation Unexpectedly Exceeds Target

January 08, 2012

Jan. 6 (Bloomberg) -- Chilean interest-rate swap yields rose the most in 10 weeks after a report showed prices increased at the fastest pace in almost three years, exceeding estimates and the central bank’s inflation target.

The one-year swap rate soared 14 basis points, or 0.14 percentage point, to 4.65 percent. Three-month breakeven inflation almost doubled to 2.95 percent from 1.48 percent yesterday, while inflation-linked swap rates plunged.

Chilean consumer prices jumped 0.6 percent last month, triple the median forecast of economists surveyed by Bloomberg and double the pace predicted in the inflation forwards market. Annual inflation was 4.4 percent, the highest since April 2009. The readings mean the central bank won’t reduce borrowing costs at its next meeting, as had been forecast by 50 of the 58 investors in a central bank survey Dec. 20, said Juan Pablo Castro, an economist at Banco Santander Chile.

“There is an almost zero probability that the central bank will cut rates in January,” Castro said from Santiago. “The central bank forecast was off by 50 basis points in just one month. That’s a warning signal that the bank will be more cautious in observing whether this inflation phenomena reverses or not.”

The six-month inflation-linked swap rate fell 60 basis points to a six-month low of 1.8 percent. The three-month inflation-linked rate plunged 140 basis points to 2.05 percent.

The two-year peso swap rate climbed 10 basis points to 4.53 percent and the three-month rate rose eight basis points to a seven-week high of 5.06 percent.

The bank, which targets inflation of 2 percent to 4 percent over two years, has kept its key interest rate at 5.25 percent for six months after raising it five times in 2011.

Inflation Outlook

Policy makers said less than three weeks ago that they expected inflation to end this year at 3.9 percent. The median estimate of 12 economists surveyed by Bloomberg was for consumer prices to climb 4 percent in the year.

Chile’s peso slid 0.2 percent to 510.93 per U.S. dollar, reversing an earlier gain, after the euro slid to a 15-month low against the dollar as confidence in the region’s economy fell. The Chilean currency gained 1.7 percent this week.

The bank forecast 2012 inflation of 2.7 percent and growth slowing to between 3.75 percent and 4.75 percent from 6.2 percent this year. That scenario still seems reasonable, said Dalibor Eterovic, chief economist at Banco Security in Santiago.

“It’s hard to think that Chile is going to decouple from the rest of the world and maintain its dynamism and inflation,” he said. “We still think a 25 basis point cut is more likely, but the risks to that forecast have risen. The higher inflation could lead the committee to consider that, while the conditions are there, they can afford to wait another month.”

Brazilian consumer prices rose 0.5 percent in December, slower than the 0.55 percent median forecast of 47 analysts.

Implied Inflation

Six-month break-even inflation, which measures the likely future average rate of price rises discounted by the swaps market, rose 68 basis points to 3 percent, the highest since July, according to prices compiled by Bloomberg. One-year break- even climbed 32 basis points to 3.10 percent, breaching 3 percent for the first time in almost two months.

Offshore investors in the Chilean peso forwards market lowered their short position in the currency against the U.S. dollar to $5.7 billion on Jan. 3 from $6.1 billion on Dec. 30. That is a $407 million bet on the Chilean peso in the first two days of the year.

Core consumer prices, which exclude fuel and produce, increased 0.7 percent in December from November.

--Editors: James Attwood, Brendan Walsh

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

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

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