Chilean Swap Rates Tumble on Central Bank’s Surprise Rate Cut

Chilean swap rates fell the most in two years after the central bank unexpectedly cut the benchmark interest rate yesterday, citing the prospects that the Federal Reserve will keep U.S. borrowing costs low.

Two-year swap rates dropped 18 basis points, or 0.18 percentage point, to 4.41 percent at 11:10 a.m. in Santiago, the lowest level on a closing basis since July 2012. The decline was the biggest since October 2011. The peso slid 0.4 percent to 495.87 per dollar after rallying yesterday to a four-month high.

Chilean policy makers lowered the target lending rate by a quarter-percentage point to 4.75 percent in the first reduction since January 2012, pointing to prospects for slower inflation. The Fed spurred demand for higher-yielding assets in emerging markets when it said last month that it would maintain $85 billion of monthly bond purchases to keep U.S. rates slow.

Chile’s “central bank acted because of concern that tapering will be delayed for a long time,” Sebastian Ide, the head of rates trading at Banco de Chile (CHILE) in Santiago. “It’s this concern about the rate differential.”

Traders are today pricing a benchmark rate of 4.5 percent by February, Ide said. He expects the bank may cut borrowing costs to as low as 4.25 percent.

The one-year break-even rate, a gauge of market inflation projections, fell to 2.46 percent yesterday from 2.89 percent at the end of August.

“Inflation has evolved below projections, remaining in the lower part of the tolerance range, while market expectations foresee a slower normalization towards 3 percent,” the central bank said yesterday.

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

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net

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