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Chilean Traders Step Up Bets on First Interest-Rate Increase Since 2008

Chilean interest-rate swap rates rose to the highest level in more than a year as traders increased bets that the central bank will raise borrowing costs tomorrow for the first time since September 2008

The three-month interest-rate swap contract rose two basis points, or 0.02 percentage point, to 1.18 percent, the highest closing level since May 2009. That implies 1 percentage point of interest-rate rises over the next three meetings.

“It’s basically saying that there’s a split chance of 25 basis points or 50 basis points,” Siobhan Morden, a strategist at RBS Securities Inc. said today in a telephone interview.

Chile’s central bank, led by President Jose De Gregorio, has kept its benchmark rate unchanged at a record low of 0.5 percent since July last year. Investors should bet that the three-month rate is too high because the bank is more likely to increase by a quarter point tomorrow, Morden said. Swaps fail to reflect the risk of an economic slowdown in Europe, she said.

Interest-rate swap rates reflect traders’ views of the average of annual interest-rates over the life of the contract. A quarter-point rate increase tomorrow would suggest a three- month rate of about 0.97 percent, while a half-point increase would imply a swap rate of 1.45 percent, Morden said.

“The three-month is going to re-price immediately: we’re either going to adjust lower or higher,” she said. “It may not adjust exactly.”

Three of the 15 economists surveyed by Bloomberg expect the bank to raise the rate by half a percentage point to 1 percent, while 12 expect a quarter-point rise to 0.75 percent. The one- year swap contract in pesos rose 1 basis point to 2.58 percent.

“The majority of economists expect 25 basis points but the market is more conservative and is split 50/50,” Morden said.

The central bank’s five-member policy committee will announce its decision after 6 p.m. New York time tomorrow. The bank will publish updated growth, inflation and copper price forecasts on June 16.

The Chilean peso was little changed at 537.43 per dollar from 537.25 on June 11 after earlier touching 532.75, the strongest level since June 3.

To contact the reporter responsible on this story: Sebastian Boyd in Santiago at sboyd9@bloomberg.net

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