Chilean Swaps Tumble Most in Three Months on Surprise Rate Cut
January 15, 2012, 7:30 PM ESTBy Randall Woods and Eduardo Thomson
Jan. 13 (Bloomberg) -- Chilean interest-rate swaps fell the most in three months and the peso snapped a three-day winning streak after central bank President Rodrigo Vergara surprised traders by cutting rates a month after taking office.
The one-year swap, or the cost of locking in a fixed interest rate, fell 17 basis points, the most since Oct. 4, to 4.48 percent while the peso slid 0.7 percent to 503.46 per U.S. dollar. Breakeven inflation rates fell the most since November.
The central bank cut the overnight rate by a quarter-point to 5 percent yesterday, signaling Vergara and his colleagues expect last month’s inflation surge to fade as economic growth slows. Only four of 20 economists surveyed by Bloomberg had predicted a reduction. The rest forecast no change.
“The decision shows that the central bank feels very comfortable about the inflation outlook; that it believes economic growth is definitely decelerating,” said Felipe Hernandez, an analyst at RBS Securities Inc.
With the second-highest borrowing costs among major Latin American countries that target a benchmark rate, Chile is joining Brazil in easing monetary policy to shore up growth as the global economy weakens.
The four-member policy board played down inflation in yesterday’s decision, attributing the 0.6 percent jump in consumer prices in December to perishable goods and the peso’s decline against the dollar late last year. The peso slumped 11 percent in the last four months of 2011.
Inflation Expectations
“We’re going to have a marginal fall in swap rates and the exchange rate,” said Jorge Selaive, chief economist at Banco de Credito & Inversiones in Santiago. “I do expect a bigger impact on inflation expectations for the year.”
Swap rates and inflation expectations had surged after the Jan. 6 inflation report that exceeded the bank’s target as traders bet policy makers would leave borrowing costs unchanged.
The three-month breakeven rate, a measure of annual inflation expectations priced into the swaps market, fell 18 basis points, or 0.18 percentage point, to 3.03 percent today. Six-month breakeven slid 10 basis points to 2.98 percent while the six-month swap dropped 24 basis points to 4.60 percent.
“This is a proactive step,” Marcelo Salomon, co-head of Latin America at Barclays Plc, said from New York. “The big question that’s on everybody’s mind now is: How big of a cycle is this? Our view is they’re going to do a gradual adjustment and play it meeting-by-meeting.”
‘Great Challenge’
Barclays, which forecast yesterday’s cut, estimates the bank may reduce rates by another 75 basis points. Bice Inversiones forecasts three cuts of a quarter-point each through March, the Santiago-based investment services company’s chief economist Cristobal Doberti said in a telephone interview after correctly forecasting the bank’s decision.
Elsewhere in the region, Peru yesterday kept its benchmark rate at 4.25 percent for an eighth month. Brazil has been the most aggressive in the region in cutting borrowing costs, lowering its benchmark rate by 150 basis points since August to 11 percent.
Chile’s economy will expand 4 percent in December from the year earlier, matching growth rate posted in November, while annual expansion will moderate to 4 percent from 6.2 percent in 2011, according to economists in the central bank’s Jan. 10 poll.
‘Neutralizing’
BCI’s Selaive said traders would have reacted more to the surprise rate cut if not for “neutralizing” comments in the bank’s accompanying statement.
“December’s headline and core inflation was higher than expected due to the prices of perishables and other foods,” the bank said in yesterday’s statement. “Inflation expectations remain near the target.”
Chile’s Finance Minister Felipe Larrain, a non-voting participant of central bank meetings, last week told reporters a rate reduction would be “reasonable” as Europe’s debt crisis worsens. The price of copper, Chile’s largest export, declined 21 percent last year and industrial production in October fell for the first time since the aftermath of the 8.8-magnitude earthquake in February 2010.
“There are a lot of short-term factors,” Larrain told an economic forum today in Santiago about December inflation. “That is shown in the central bank’s actions yesterday, where there was a judgment on whether or not it was short term.”
--Editors: James Attwood, David Papadopoulos
To contact the reporter on this story: Randall Woods in Santiago at rwoods13@bloomberg.net.
To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net David Papadopoulos at papadopoulos@bloomberg.net
