Chilean Peso Is Poised for Fifth Straight Weekly Gain on Economic Growth

Chile’s peso recorded a fifth straight weekly gain after industrial output grew more than forecast and concern of a double-dip U.S. recession eased.

The peso rose 0.3 percent to 495.78 per U.S. dollar from 497.2 yesterday. Interest-rate swap rates declined as traders bet that the rising peso would curb inflation and limit the need for interest-rate rises.

The peso appreciated 0.8 percent this week and 10 percent so far this quarter, outpacing the six other Latin American currencies tracked by Bloomberg. Chile’s economic growth is accelerating after a recovery from last year’s slump lagged other emerging markets because of February’s earthquake. The central bank can “comfortably” raise borrowing costs by another 50 basis points this month, said Rodrigo Aravena, chief economist at Banchile Inversiones.

“Chile has one of the fastest rates of growth in Latin America so it’s natural that the currency appreciates,” Aravena said by telephone from Santiago. “It’s not going to stop until it reaches 480.”

Industrial output grew 3.3 percent in July from a year earlier, the national statistics institute said Aug. 30. The median of 12 economists surveyed by Bloomberg was 3 percent. The economy expanded 6.5 percent in the second quarter from a year ago, the biggest increase in five years and more than the 6.2 percent median estimate of 12 economists in a Bloomberg survey.

Chile plans to offer credit to small businesses with revenues in U.S. dollars in a bid to help offset the effects of the peso’s region-beating rally. The government will offer $200 million in eight-year loans in dollars and pesos through a state-owned lender, Finance Minister Felipe Larrain said today.

Third Increase

The central bank last month raised its benchmark rate by a half-point for the third straight month, saying in a statement that it would continue to remove monetary stimulus at a pace determined by economic conditions.

Chilean interest-rate swap rates sank as the rising currency damped inflation expectations.

The one-year swap rate in pesos fell 13 basis points to 3.61 percent from 3.74 percent on Aug. 27, its biggest weekly decline since May. The two-year rate fell eight basis points to 4.04 from 4.12 on Aug. 27. The 10-year rate slid four basis points to 5.33 percent, the lowest since July 2009, from 5.37 percent on Aug. 27 according to data compiled by Bloomberg.

Inflation Expectations

Consumer prices may have increased 0.02 percent in August, according to Banco Santander SA prices for inflation forwards. A month ago on Aug. 3, the inflation forwards market was pricing in 0.47 percent price rises this month. Inflation may end this year at 3.41 percent, inflation forwards show.

As recently as Aug. 9, the forwards market was expecting inflation to pass 4 percent, the upper limit of the central bank’s target band, for five months from March through July next year. Today traders are pricing in average annual inflation of 3.44 percent during that period, according to Bloomberg calculations using Banco Santander SA prices.

“If inflation forwards are falling, then logically rates have to fall as well,” said German Fritsch, head of trading at Deutsche Bank AG in Santiago. “If the market is reducing inflation expectations going forward, it has to reduce the outlook for interest rates.”

Traders reduced the inflation they were pricing into the swaps market after a tax rise on loans was reversed and planned fare increases for public transport were canceled. The appreciating peso also cuts the cost of Chile’s imports, such as oil and gas.

Breakeven

The one-year breakeven inflation rate, a measure of traders’ expectations for average annual price rises over the next 12 months, fell to 3.45 percent today from 3.63 percent a week earlier. The two-year rate declined to 3.29 percent from 3.43 percent on Aug. 27, according to Bloomberg calculations.

“Short-term inflation may be limited by the exchange rate,” Aravena said. “We’re seeing declining inflation and growth expectations in the rest of the world and that will affect Chile. The economy could start to slow next year which may restrain central bank rate increases.”

After the bank lifts by a half-point for a fourth straight month in September, it may slow the pace of interest-rate increases from, he said.

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

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