Chilean Swaps Traders Expect Quarter-Point Rate Increase Today

Chile’s central bank will slow its monthly interest-rate increases to 25 basis points today and probably won’t announce the extra borrowing that could accompany an intervention in the currency markets, according to traders in the interest-rate swap and bond markets.

The one-year interest-rate swap rate in pesos has declined 37 basis points to 3.71 percent since the central bank’s last meeting on Sept. 16. The Chilean peso slid 0.2 percent to 478.95 per U.S. dollar today from 478.05 per dollar yesterday. The peso declined for a second day on concern the central bank may announce intervention to weaken the currency today.

The last time the bank intervened, from April 2008 through September 2008, it bought $50 million a day and “sterilized” the intervention by selling short-term debt to prevent an oversupply of pesos. Traders aren’t pricing in a similar “sterilized” intervention after today’s meeting.

“What the market is expecting is 25 basis points: that’s what the swaps market is telling us,” said Jorge Selaive, chief economist at Banco de Credito e Inversiones in Santiago. “If you’re going to sterilize an intervention you would see rises in the real and nominal curves, instead the market is suggesting that the bank will slow the speed of normalization.”

The two-year rate fell to 4.16 percent from 4.39 percent on Sept. 16. Interest-rate swaps reflect traders’ expectations for average interest rates over the life of the contract.

Rate Increases

Swaps traders are betting the central bank will slow the pace of rate rises from 50 basis points in the past four monthly meetings. The appreciation of the peso, which has gained 14 percent in the second half, has helped lower the prices of imports and contributed to reduced inflation expectations.

A quarter-point rate increase would mean the Chilean central bank has boosted rates 2.25 percent this year, more than any other major rate-setter tracked by Bloomberg. In the last three months, the Chilean central bank has raised the benchmark rate by 1.5 percent, second only to Venezuela.

“Inflation expectations have corrected downwards, as have expectations for interest rates,” said Rodrigo Aravena, an economist at Banchile Inversiones in Santiago. “The market is recognizing that the central bank will raise rates more slowly and also the appreciation of the peso is contributing to the reduction of external inflation, so the inflation measures implied in the curve tend to fall.”

Peso Retreat

The Chilean peso has declined 0.6 percent against the U.S. dollar in the last two days, less than the Colombian peso and more than the other Latin American currencies tracked by Bloomberg. Central bank President Jose De Gregorio told lawmakers in Congress on Oct. 6 that the central bank had discussed intervening in the peso following its “fast” and “significant” appreciation.

The central banks of Brazil, Colombia and Peru have all taken steps to weaken their currencies against the dollar.

“Below 480 we believe the central bank would bear in mind a possible intervention,” said Moises Junca, chief Latin American currency strategist at BBVA Bancomer SA in Mexico City. “Chile is the odd one out.”

A quarter-percentage-point rate increase would match the median forecast of 21 economists in a Bloomberg survey. Of the 21 analysts, 14 expect a 25 basis point increase to 2.75 percent while seven forecast a fifth straight half-point hike to 3 percent.

Yield Increase

Yields on inflation-linked bonds have risen since July. The yield on a basket of denominated in unidades de fomento central bank bonds due in 10 years was 3.14 percent today after rising to a five-month high yesterday. The yield has risen from 2.59 percent at the end of August.

Unidades de fomento are Chile’s inflation-linked accounting unit. The value of the unit is reset daily to reflect consumer price increases.

“What has happened since July is that real rates have been rising because of lower expectations of inflation,” said Aldo Lema, chief economist at Banco Security in Santiago. “There was a decline in appetite for unidades de fomento and that has led to an unwinding of positions and a move into nominal rates.”

Shorter-dated inflation-linked yields declined on expectations for slower interest-rate rises. The yield on one-year inflation-linked swaps dropped to 0.21 percent today, according to prices compiled by Bloomberg, from 0.89 percent on Sept. 16.

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