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Chile Swaps Fall as Traders Bet Peso Will Halt Rate Increases

Nov. 2 (Bloomberg) -- Chilean interest-rate swap rates fell on speculation the central bank will stop raising borrowing costs as soon as next month as Latin America’s best-performing currency helps keep inflation under control.

The one-year swap rate fell 8 basis points, or 0.08 percentage point, at 12:43 p.m. New York time, extending a decline to 15 basis points since the central bank published the minutes of its last policy meeting. The two-year rate is down by 20 basis points and the three-year by 16 basis points in the same period. The three-month swap rate of 3.05 percent implies the bank will skip a rate increase in either December or January, according to Bloomberg calculations.

The bank, which has increased its benchmark rate more than any other major central bank tracked by Bloomberg this year, plans to keep raising borrowing costs as the economy expands at the fastest pace in six years, according to the minutes from an Oct. 14 meeting. Policy makers lifted the rate by 25 basis points to 2.75 percent on Oct. 14 after four half-point increases. Under pressure to stem the peso’s rally they may stop raising after this month, said Benito Berber, an economist at Nomura Holdings Inc. in New York.

“Despite the strength in the economy, despite domestic demand and despite market inflation forecasts, it’s very unlikely the central bank will raise the rate above 3 percent,” Berber said by telephone.

Mitigating Inflation

In its minutes the bank acknowledged that the peso’s appreciation, partly driven by the growing gap between rates in Chile and those in developed economies, was mitigating inflation and may reduce the need for future rate increases.

“The trajectory of domestic monetary policy shouldn’t be immune from what was happening in the rest of the world,” one of the bank’s policy makers said, according to the minutes.

“Several councilors suggested that the recent appreciation in the exchange rate would contribute to reducing inflationary pressures, which should be taken into account by monetary policy,” the bank said.

Before the central bank’s last meeting the swaps market was pricing in a series of quarter-point increases to 4.5 percent. Siobhan Morden, a strategist at RBS Securities Inc. in Stamford, Connecticut said the bank may lift rates in December then pause until July or August.

“To reach 4.5 percent the central bank would have to hike for seven consecutive months,” Moren said. “Do you really think they can do that without coming under pressure? I think we have to price in a policy risk premium.”

Chile’s peso has gained 12 percent in the second half of this year, the best performance among seven Latin American currencies tracked by Bloomberg. It climbed 0.5 percent today.

Planned Measures

Chilean President Sebastian Pinera has already summoned the bank’s policy makers to discuss the currency. While Pinera said on Oct. 18 that he plans measures to curtail the peso’s gain, bank President Jose De Gregorio told Diario Financiero in an interview published Oct. 29 that the bank would already be intervening in the currency if it thought it was justified. The central bank won’t comment on policy ahead of its next meeting on Nov. 16, press officer Jaime Troncoso said today.

The median forecast of 49 traders and investors in a central bank survey on Oct. 26 was that inflation would reach 3.3 percent in a year’s time. The one-year breakeven inflation rate implies that swaps traders expect annual inflation to average about 3.3 percent over the next 12 months, according to Bloomberg calculations. Swaps rates suggest inflation will then slow to an average of 2.85 percent over the subsequent 12 months, according to Bloomberg calculations.

Chile’s economy grew 7 percent in September from a year earlier, according to the median forecast of 40 economists surveyed by the central bank on Oct. 12. That would imply 7.2 percent growth in the third quarter, according to Bloomberg calculations, the fastest since the fourth quarter of 2004.

Swaps traders are pricing in an interest rate of 5 percent over the next 18 months, said Roberto Melzi, a strategist at Barclays Capital in New York.

“But it seems like there’s a pause,” Melzi said by telephone. “The market doesn’t expect to see the rate going over 4 percent in the next 12 months and we don’t disagree.”

To contact the reporter responsible on this story: Sebastian Boyd in Santiago at

To contact the editor responsible for this story: David Papadopoulos in New York at

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