Chilean Swap Rates Soar on Outlook From Vergara; Peso Declines

Chilean swap rates rose the most in five months after central bank president Rodrigo Vergara said two consecutive reductions in borrowing costs don’t necessarily mean policy makers will cut again in December.

The one-year swap rate climbed seven basis points, or 0.07 percentage point, to 4.27 percent, the biggest increase on a closing basis since June 20. The two-year swap rate increased five basis points to 4.25 percent. Yields on 10-year bonds rose six basis points to 5.04 percent, the highest since Oct. 28. The peso depreciated 0.2 percent to 520.93 per dollar at the close of trading in Santiago.

The central bank’s decision to lower its benchmark rate in October for the first time since January 2012 and reduce it again in November to 4.5 percent doesn’t mean that policy makers plan progressively lower rates with decreases at every meeting, Vergara told La Tercera in an interview published yesterday. The bank has a neutral bias, and future decisions will depend on new data, Vergara said.

“He is trying to say they don’t want to go fast and is putting a damper on market expectations they would cut again,” Felipe Alarcon, an economist at Banco de Credito & Inversiones in Santiago. “It’s confusing because what he said contradicts what they did.”

The central bank’s press office declined a request for comment from Bloomberg News.

Swap rates project that the central bank will hold the target lending rate steady in December compared with an outlook last week for a reduction of a quarter-percentage point, according to Banco de Chile research.

The one-year inflation-linked swap rate rose seven basis points to 1.81 percent. It earlier today was below the lower 20-day Bollinger band, indicating a possible reversal.

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