A rate cut in Chile will drive more gains for peso bonds

2023-07-31 12:54:00

Chilean bonds have three weeks of gains in anticipation of a expected rate cut. The fact that the cut was bigger than anticipated, and signs that more cuts were to come in the future, means that the gains will continue.

Chile’s economy contracted and the Central Bank prepares rate cuts

The advice of BCCh vunanimously voted to reduce borrowing costs by 100 basis points to 10.25%. Only four of 26 economists in a Bloomberg survey bet on this. All the others anticipated cuts of 50 or 75 basis points.

The bank also said that rates would fall in line with market expectations (according to the most recent survey of operators, they would fall to 7.75% in December) and more than what the bank forecast in the latest monetary policy report. The cut puts Chile ahead of the easing cycle in Latin America in the coming months.

“The magnitude of the rate cut was within the expected range”, said Ariel Nachari, strategist at SURA Investments. “Howeverit is likely that the expansive bias of the statement and projections of even faster rate cuts in the future cause further declines in interest rates and make the dollar rises against the peso.

Fixed income investors have done well recently. The one-year and two-year swap rates have fallen 69 and 32 basis points, respectively, in the last three weeks. Since the end of May, the 2026 peso bond rate has fallen 112 basis points to 5.45%.

Cut Announced

Friday’s cut was almost inevitable. Consumer prices fell in June and the economy has contracted in each of the last four months. It was the size of the reduction that took the market by surprise.

“We recommend maintaining greater exposure to instruments in pesos and of longer duration,” BICE Inversiones analysts said on Friday. These “would be favored in the context of lower inflation records and cuts in the reference rate.”

Analysts at Coopeuch and Fynsa also expect yields to fall further, especially on the short end of the curve, and for the peso to fall against the dollar, according to reports published after the decision.

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Friday’s statement led Banco Santander and Scotiabank analysts to forecast another 100 basis point cut on September 5 and estimate a year-end rate of close to 7.5%.

Swaps Anticipated

Neverthelessthe initial earnings on Monday may be somewhat disappointing. This is because, although the rate cut was more aggressive than expected, it was in line with what the swap rates discounted from the June inflation data.

Additionally, traders will be watching for economic activity data for June which is released on Tuesday. Most economists in a Bloomberg survey expect a 0.2% drop month-over-month. Higher-than-expected growth could weaken the market’s reaction to the rate decision.

After the announcement on Fridays, the president of the Central Bank, Rossana Costa, told CNN Chile that inflation would probably slow another four percentage points by December and assured that “this will not end until we reach inflation of 3%.”

ECONOMIC CALENDAR:

• Chile:
  • Jul. 31: June manufacturing and industrial production
  • Jul. 31: June copper production
  • Jul. 31: June Retail Sales
  • Aug. 1: June economic activity
• International
  • EU
    • Jul. 31: PMI MNI Chicago July
    • Aug. 1: S&P Manufacturing PMI
    • Aug. 1: July manufacturing survey
    • Aug. 3: S&P Composite and Services PMI
    • Aug. 3: Factory Orders June
    • Aug. 3: June Durable Goods Orders
    • Aug. 4: July unemployment rate
  • Eurozone:
    • Jul. 31: PIB 2T
    • Jul. 31: July CPI

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TREASURY ISSUANCE CALENDAR

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