Chilean Swap Rates Fall as Consumer Prices Drop: Santiago Mover

Chile’s swap rates and traders’ projections for inflation plunged after the consumer price index fell more than analysts forecast and the statistics agency offered no timetable for changing its methodology.

The two-year swap rate fell 16 basis points, or 0.16 percentage point, to 4.60 percent, the lowest since August. The break-even rate, a gauge of market inflation expectations derived from the difference between fixed-rate and index-linked swaps, dropped 27 basis points to 2.32 percentage points. Yields on inflation-linked bonds and swaps rose as investors dumped indexed assets.

Annual inflation slowed to a three-year low of 1 percent. Central bank President Rodrigo Vergara said today in Santiago that the inflation rate is showing a downward trend even when items questioned by economists are left out. Traders in the swaps market projected today two 25 basis point reductions in the central bank policy rate, which has been on hold at 5 percent since February 2012.

“It was brutal,” Rodrigo Blazquez, a trader at Deutsche Bank AG in Santiago, said in a telephone interview. “The market is pricing in two rate cuts. The central bank’s language is a little more dovish, so two cuts are doable, especially after today’s inflation.”

The statistics agency reported today that consumer prices fell 0.5 percent in April from the prior month, a drop bigger than the 0.1 percent decrease that economists surveyed by Bloomberg had forecast.

Juan Eduardo Coeymans, the statistics agency’s new director, said yesterday that it may take the agency until next year to come up with a new methodology for determining the rate of inflation after his predecessor, Francisco Labbe, quit as analysts questioned the way the consumer price index was compiled.

Vergara’s View

Vergara said today that the statistics agency’s data concern had not and would not affect monetary policy and that policy makers expected the slowdown in annual inflation to be transitory. Inflation expectations are anchored around the central bank’s 3 percent target, he said.

“There is no certainty about when there’ll be a revised measurement,” Patricio Aliaga, a proprietary trader at the Chilean unit of Bank of Nova Scotia, said in a telephone interview. “It will be a long time, and the market is reacting to that. Inflation-linked bonds lose value and yields are rising. In this disorder, people don’t want to hold positions. Inflation is dark and dirty and the market is punishing it.”

The yield on five-year inflation-linked bonds rose nine basis points, the most since January, to 2.47 percent. The yield on five-year fixed-rate bonds dropped six basis points to 5.16 percent.

Today’s figures mean the value of assets denominated in unidades de fomento, Chile’s inflation-linked accounting unit, will erode throughout the month.

The peso weakened 0.2 percent today to 471.16 per U.S. dollar. Vergara said the central bank doesn’t rule out intervention even as it recognizes that intervening to weaken the currency would have costs.

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