UBS Holds Sway as Chile Traders Embrace Rate Call
UBS AG (UBSN)’s Rafael De La Fuente was alone last month when he said Chilean interest rates would rise in the first half, just as inflation slowed to a 2 1/2-year low.
Now, with wages rising four times faster than consumer prices and joblessness at a record low, traders are starting to embrace the most-accurate forecaster of Chilean monetary policy. Two-year interest-rate swaps rose seven basis points in the past month to 5.23 percent, indicating traders expect the key rate to increase a quarter-point to 5.25 percent by July, Banco de Chile said. A month ago, swaps implied no change until October.
De La Fuente’s more-aggressive call for a half-point increase is being supported by the fastest economic expansion in 11 months in November and wage growth that surpassed cost-of- living increases by 5 percentage points. At De La Fuente’s 5.5 percent forecast, Chile’s interest rate would be the highest since February 2009 and at least a full percentage point above that of Mexico, Peru and Colombia.
“This is still an economy that looks tight to me in terms of not having much excess capacity to work with,” De La Fuente, ranked first among analysts based on a two-year history of rate predictions complied by Bloomberg, said by telephone from Stamford, Connecticut. “This is an economy that will need to find a way to cool off domestic demand.”
Central bank officials weren’t available to comment on monetary policy because the bank is in a quiet period before today’s meeting, communications director Luis Alvarez said in an e-mail.
The jobless rate fell to 6.2 percent in the three months through November, the lowest level since Chile’s government changed its methodology in 2010.
De La Fuente was the only economist among 13 forecasters surveyed by Bloomberg last month who said rates would rise in the first six months of the year.
Deutsche Bank AG, the only other firm to anticipate an increase in 2013, said the rate would increase a half-point in the fourth quarter. Three predicted a rate cut.
“Every day there are more reasons for us to worry about inflation,” Rodrigo Aravena, the chief economist at Banchile Inversiones and the second-ranked forecaster, said by telephone from Santiago. “Our primary risk scenario is for inflation to be higher than forecast with the central bank raising rates.”
Aravena, who didn’t participate in the December survey, says his baseline estimate is for rates to remain unchanged this year. The odds of rates increasing this year have increased as economic growth exceeds analyst estimates, he said.
In a January poll by the central bank, traders and investors anticipated a rate increase by January 2014, one month after saying they wouldn’t rise until December next year.
Since the central bank published that poll on Dec. 12, economic growth in Chile topped analysts’ estimates for the fourth straight month and the unemployment rate fell 0.9 percentage point in November from the year earlier.
That will cause the inflation rate to double to 3 percent within a year, according to traders surveyed by the bank.
Policy makers have kept the key rate unchanged at 5 percent since February 2012 after making a quarter-point reduction in January of that year. All analysts surveyed by Bloomberg, including De La Fuente, expect the bank board to keep borrowing costs unchanged today.
The bank publishes its decision after 6 p.m. local time.
Chile already has the highest borrowing costs among major rate-setting banks in Latin America apart from Brazil, which has cut interest rates to 7.25 percent from 12.5 percent in July 2011. Colombia’s central bank also reduced rates in its past two meetings to boost economic growth, while Peru and Mexico have kept them unchanged.
Chile’s bank may be reluctant to increase borrowing costs in the first half of the year because higher interest rates could put more pressure on the peso, which has appreciated 5.1 percent against the dollar in the past 12 months, according to Mario Arend, the chief economist at Celfin Capital SA.
“We don’t see any change in the interest rate in the short term because of the impact it could have on the exchange rate,” he said by telephone from Santiago. “The real exchange rate is arriving at levels that are very similar to what we saw during the last intervention.”
The bank board in January 2011 started a program to buy dollars in the spot market to weaken the local currency after the peso traded at 465.75 per U.S. dollar. The peso appreciated 0.3 percent to 473.66 per dollar at 9:11 a.m. in Santiago.
For now, the peso hasn’t dented growth. The economy expanded 1.3 percent from October on a seasonally adjusted basis after gains in the service, mining and retail industries. The growth, more than triple the median estimate, changed the outlook of some analysts who now expect rates to rise sooner than before, said Arend.
The expansion has thus far caused imports rather than inflation to surge as consumers increase purchases abroad without putting pressure on domestic prices, according to Alfredo Coutino, Latin America director at Moody’s Analytics.
Imports increased 5.6 percent last year, according to the central bank, while consumer prices rose 1.5 percent.
“The fact that inflation is declining doesn’t mean the economy isn’t overheating,” Coutino said by telephone from West Chester, Pennsylvania. “As pressures on domestic demand accumulate, inflation will start a trend of acceleration probably around May or June of this year, and that is going to force the central bank to start hiking.”
To contact the reporter on this story: Randall Woods in Santiago at email@example.com
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