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Swaps Signal Rate Increase on Growth Prospects: Santiago Mover

March 14 (Bloomberg) -- Chilean interest-rate swaps soared the most in two months as investors started pricing in an increase in the central bank’s benchmark rate by the end of this year amid signs of an improved economic outlook.

The one-year swap rate rose 16 basis points, or 0.16 percentage point, to 5.28 percent as of 1:15 p.m. in Santiago, the biggest intraday gain since Jan. 6 and the highest level since Aug. 8. The two-year rose 15 basis points to 5.38 percent.

The median forecast of 55 traders and investors in a central bank survey released today was that the monetary-policy rate will remain at 5 percent for the next six months before reaching 5.25 percent within a year. Trading shows investors are now pricing in a rate increase as soon as September, according to Jose Miguel Gredilla, a Chilean rates trader at Banco Santander Chile in Santiago.

“Internal demand is very strong and there’s a lot of inflationary pressure,” Gredilla said. “When the central bank cut rates the market was pricing in a couple more cuts. Now markets have reversed and are pricing in a hike.”

The one-year breakeven inflation rate, a measure of the average future inflation rate priced into the swaps market, rose eight basis points to 3.57 percent.

Chile’s government is coordinating efforts with the central bank to contain inflation, Finance Minister Felipe Larrain told reporters today. The minister, a non-voting participant of bank meetings, said rising inflation rates probably will have an impact in tomorrow’s meeting of policy makers.

Bonds Drop

U.S. bonds and swaps sold off today after the Federal Open Markets Committee improved its outlook for growth. The five-year U.S. swap rate rose nine basis points to 1.32 percent.

“The widely expected local deceleration has been more benign than forecast, the labor market is quite tight and consumption will be very strong,” said Felipe Alarcon, an economist at Banco de Credito e Inversiones in Santiago. “The external scenario has improved quite a lot and the Fed, with its optimistic message, was the cherry on the cake.”

BCI expects the benchmark rate to reach 5.75 percent by the end of this year from 5 percent today.

Chile’s peso weakened as copper, the country’s biggest export, declined after China signaled it would keep curbs on housing sales. The peso fell 0.7 percent to 486.5 per U.S. dollar at the close in Santiago from 483.1 yesterday.

Relaxing Limits

China’s Premier Wen Jiabao said today that relaxing limits on the housing market may cause “chaos.” Copper, used in pipes and wiring, accounts for more than half of Chile’s exports.

“Today should have been a rally but the Chinese premier spoke in the morning and said house prices were unreasonable,” said Cristian Donoso, a trader at Banchile Corredores de Bolsa SA in Santiago. “That clouded the outlook. It’s killing commodities and copper is a key driver.”

Copper for May delivery slid as much as 1.8 percent to $3.8335 a pound on the Comex in New York.

Offshore investors in the Chilean peso forwards market cut their short position in the currency to $5.5 billion on March 12. They had a $5.8 billion short position on March 8, the biggest since the start of the year.

Chile’s economy increased a faster-than-forecast 5.5 percent in January from the previous year, accelerating from 5.3 percent in December. Consumer prices climbed 0.4 percent in February from the previous month compared with the 0.2 percent median estimate of 18 analysts surveyed by Bloomberg.

Economists in a monthly survey released March 12 increased their gross domestic product growth forecast for 2012 to 4.4 percent from 4.1 percent in the February survey. GDP probably rose 4.5 percent in February from last year, the poll showed.

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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