Chile Breakeven Drops After Central Bank Eschews Easing

Chile’s swaps traders lowered their inflation projection to the lowest level in more than two years after policy makers refrained from following Brazil and South Korea in cutting borrowing costs.

Chile’s two-year breakeven inflation rate, a measure of the average annual pace of future consumer price increases implied by the difference between nominal and inflation-linked yields, fell eight basis points, or 0.08 percentage point, to 2 percent. It was the lowest level since January 2010. Policy makers, who target 2 percent to 4 percent inflation over two years, left the benchmark lending rate at 5 percent.

While 93 percent of economists polled by the central bank correctly projected that policy makers would hold rates in July, more than 20 percent of traders in a separate survey forecast a cut. Traders “punished” inflation expectations today as a result, according to Jorge Selaive, chief economist at Banco de Credito & Inversiones.

“They were surprised by the Chilean central bank’s increased aggressiveness with regards to fighting inflation,” he wrote regarding traders in an e-mailed response to questions. “Very negative private expectations for July inflation have started to emerge.”

Consumer prices dropped 0.3 percent in June, the first decline since August 2010.

Policy makers in Brazil lowered borrowing costs by 50 basis points to a record 8 percent on July 11 to revive growth that is waning as global demand weakens. The Bank of Korea unexpectedly cut rates that same day for the first time in more than three years, joining the global push for monetary stimulus.

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

To contact the editor responsible for this story: Joshua Goodman at

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