Chilean Rate Swaps Rise as Minutes Spur Economist Estimates

Chilean interest-rate swap rates rose as central bank meeting minutes released today led economists to forecast a third half-point increase in borrowing costs.

The one-year swap rate in pesos climbed nine basis points, or 0.09 percentage point, to 3.56 percent and the two-year rate rose 12 basis points to 4.09 percent at 4 p.m. New York time.

Chile’s central bank committee only debated raising the benchmark rate by half a percentage point on July 15, according to minutes published on the banks’ website. They voted unanimously, considering that rising inflation expectations weren’t “yet” enough to justify a policy change. Brazil’s central bank said July 29 that growth may have slowed to sustainable levels, helping to contain inflation risks.

“The Brazil minutes were more dovish than the market expected, but not here,” said Juan Pablo Castro at Banco Santander SA. “The central bank is concerned about higher inflation expectations and the risk it sees are to the upside.”

Castro, Alberto Ramos at Goldman Sachs Group Inc. and economists at Santiago-based Bice Inversiones all published research calling for a half-point rise in the Aug. 12 meeting. Economists at BCI Corredor de Bolsa SA reiterated an earlier forecast of a 75 basis-point increase, which would be the biggest since 2001.

The rate may reach three percent by October and six percent by the middle of next year, Banco Security chief economist Aldo Lema wrote today in a note to clients.

Inflation-Linked Rate

The one-year inflation-linked swap rate rose 25 basis points to minus 0.68 percent. Interest-rate swap rates reflect traders’ estimates of the likely average interest rate over the life of the contract.

The five-member policy board, led by bank President Jose De Gregorio, last month raised the rate to 1.5 percent from 1 percent, matching the forecasts of all but one of the 16 economists surveyed by Bloomberg. In June they also considered a quarter-point rise.

“There’s no reason to accelerate the pace of hiking given the uncertainty of the global outlook,” Ramos said. “For a central bank that meets every month, 50 basis points is more than enough. There’s no reason to go to more than that unless inflation is a big surprise.”

Prices may have risen 0.7 percent last month and the annual pace of inflation may reach 3.29 percent this month, according to the inflation forwards market, as electricity providers pass on wholesale price rises. Prices climbed 1.2 percent in June from a year earlier and 1.5 percent in May.

Economy Expands

Economic activity, which surprised economists by expanding the most in five years in May, was in line with the bank’s last forecasts, while expanding demand was driving faster inflation, the central bank said.

“All the councilors agreed that the information gathered in the last month indicated that the most reasonable thing was to continue with the process of monetary-policy normalization and raise the monetary-policy rate by 50 basis points,” the bank said.

Chile’s peso gained the most among major Latin American currencies today, rising 0.7 percent to 517.55 per U.S. dollar from 521.25 on July 30. It reached 516.25, the highest since April 30.

Chile’s economy grew 7.1 percent in May from a year earlier. Economists had forecast annual growth of 5.5 percent, according to the median estimate in a Bloomberg survey.

Unemployment slid to 8.5 percent in the three months through June from 8.8 percent in the three months through May. The median estimate of 11 economists surveyed by Bloomberg was for a rise in the rate to 8.9 percent.

Chile’s central bank aims for inflation to be 3 percent in two year’s time. The inflation forwards market suggests the pace of price increases may breach the upper limit of the bank’s 2 percent to 4 percent range in March of next year, according to Banco Santander SA prices.

The central bank in July 2009 reduced the benchmark rate to 0.5 percent to help pull South America’s fifth-biggest economy out of its deepest slump in a decade. The bank kept the rate at the record low until June’s policy meeting as Chile recovered from February’s 8.8-magnitude earthquake.

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