Chilean breakeven inflation rates plunged and traders started betting on deflation through August after consumer prices unexpectedly dropped last month.
One-year breakeven, a measure of swaps traders’ expectations for average future price rises, fell 21 basis points to a two-year low of 2.07 percent at 2:21 p.m. in Santiago. Two-year breakeven inflation fell 12 basis points to 2.31 percent. A drop in interest-rate swaps signaled traders expect the central bank to lower borrowing costs faster and sooner than they did yesterday.
Consumer prices fell 0.3 percent in June, confounding economists whose median estimate was for a 0.1 percent rise in prices. The steepest decline in prices since 2009 came after Chilean economic growth accelerated in May to 5.3 percent.
“This was a surprise,” said Benjamin Sierra, financial markets economist at Scotiabank Chile in Santiago. “We’re seeing very strong deflationary pressure coming from abroad, principally from food and fuel.”
The Chilean peso fell 0.6 percent to 498.45 per U.S. dollar, trimming its weekly gain to 0.5 percent.
The cost of living dropped as the price of oil fell. The price of West Texas Intermediate crude oil expressed in pesos fell 12 percent to an average 41,810 pesos per barrel in June from an average 47,534 pesos per barrel in May. Annual inflation will end 2012 at 1.48 percent, according to the forwards market today.
Prices fell in eight of the 12 areas the government measures in its consumer price survey, the National Statistics Institute said in today’s report. Clothing and footwear prices led the decline, falling 2.2 percent from the previous month, followed by a 1.1 percent drop in utilities and 0.5 percent fall in transportation, it said.
The one-year interest-rate swap fell nine basis points to 4.62 percent today. The two-year rate fell nine basis points to 4.44 percent. Swap rates reflect expectations for average future interest rates, and having all the maturities between three months and 10 years below the current rate of 5 percent shows traders expect the central bank to cheapen borrowing costs.
Traders in the forwards market for unidades de fomento, Chile’s inflation-linked accounting unit, had bet on a June price decline while economists estimated an increase.
Annual inflation may slow to 1.35 percent in February before rising again toward the central bank’s target of 3 percent, according to forwards prices today.
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