Chile Inflation Outlook Falls on Loan Tax Cut Plan; Peso Rises

Chilean traders’ inflation expectations fell to the lowest this year as Finance Minister Felipe Larrain announced a plan to reduce taxes on loans.

The two-year breakeven inflation rate declined six basis points, or 0.06 percentage point, to a three-month low of 2.68 percent at 3:57 p.m. in Santiago. The indicator tracks the gap between fixed and inflation-linked swap rates to reflect the average pace of consumer price increases projected by traders.

The two-year breakeven rate has tumbled from a high of 3.07 percent in February following slower-than-forecast price increases last month. Temporary tax cuts on fuel prices helped accelerate the slide in inflation expectations.

“They have been falling for weeks since the lower-than-expected February number,” said Rodrigo Blazquez, a trader at Deutsche Bank AG’s Santiago unit. “They were rising slightly today, but started falling again after the tax duty announcement.”

The government will send to Congress a rule cutting the stamp duty, or tax on loans, to 0.2 percent from 0.4 percent, Larrain told reporters today in Santiago. The government hopes lawmakers will approve the bill within a couple of months, he said.

The tax rate was 1.2 percent when Larrain entered office. Cutting it to 0.2 percent will cost the government $200 million, he said.

Inflation View

Traders in the forwards market for unidades de fomento, Chile’s inflation-linked accounting unit, expect that consumer prices will rise 2.54 percent this year, compared with a projection of 2.98 percent a month ago.

Annual inflation eased to 1.3 percent in February from 1.6 percent in January, the government reported March 8.

Prices will probably rise 0.3 percent in March and may fall in April, according to Jorge Selaive, the chief economist at Banco de Credito & Inversiones in Santiago. He expects 2.4 percent inflation in 2013.

“We will have falls in fuel and electricity, but beyond the short-lived and temporary effects in March and April, we expect no further deflationary impacts in the second half,” he said in a phone interview.

The two-year swap rate in pesos fell two basis points to 5.16 percent today.

Volatility in the Chilean peso dropped to a 15-year low as the threat of central bank intervention kept the currency trading in a shrinking range.

The peso gained 0.2 percent to 472.20 per U.S. dollar at the close in Santiago. Thirty-day volatility, a gauge of the magnitude of the currency’s average daily fluctuations over the period, dropped to its lowest level since June 1998 while 90-day volatility fell to its lowest since 1997.

The currency has traded in a range of 469 to 476 per dollar since Jan. 4 and 471.7 to 473.5 for the past week.

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