Chile Set to Spearhead Global Rate Cuts as Boom Turns to Bust

(Bloomberg) — Chile is set to lead the world into a steep interest rate cutting cycle next year as inflation slows and its economy goes from boom to bust, according to swap markets.

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Traders are forecasting more than 5 percentage points in cuts in the next 12 months after a surprise inflation print last month and as the economy teeters on the edge of recession, following the fastest growth on record in 2021. Only one other nation comes even close to that — Hungary — while many others will continue raising rates.

The central bank has put borrowing costs on hold after raising rates by 10.75 percentage points in one of the earliest and most aggressive tightening campaigns in the world. Now, it’s forecast to reverse course as inflation expectations tumble. One-year breakeven inflation — a measure of the average inflation swaps are pricing in for the next 12 months — has dropped by more than 500 basis points since peaking in July, the fastest decline over a similar period since 2008.

“Inflation will continue easing sharply due to high interest rates, fiscal austerity, decreasing domestic demand and falling commodity prices,” said Andres Abadia, chief economist at Pantheon Macroeconomics in the UK. “It’s very possible we’ll see rate cuts in Chile in the first quarter.”

The decline in rate expectations came as annual inflation slowed more than expected last month, its second straight decline, causing traders to start pricing in rate cuts as soon as January. Only two days after that figure, the U.S. posted cooler-than-expected price data, giving the Federal Reserve extra room to moderate its aggressive interest-rate hikes.

Getting Urgent

There’s an urgency to the removal of the monetary-policy brake with analysts surveyed by Bloomberg forecasting the economy will be the only one in Latin America to contract next year. Analysts have cut their forecast for 2023 growth by 2.85 percentage points in the past year, to -0.85%. Even crisis-ridden Argentina is expected to do better than that.

And the impact of higher borrowing costs is easy to see. Measured in Unidades de Fomento, Chile’s inflation-linked accounting unit, outstanding commercial loans fell 3.1% in October from a year earlier.

That is why analysts are expecting rates to fall so far, so fast.

As the rate outlook declines, local bonds have rallied. That has encouraged companies to issue debt for close to $343 million in November, making it the third-most active month in local debt issuance this year with almost two weeks to go.

Empresas Copec sold 6.5 million in UF ($253m) in 10- and 20- year bonds with a coupon of 3.15% last week, while Ruta del Loa and Caja Los Andes issued debt for smaller amounts. Banco Estado, Banco Santander, Banco Security, Scotiabank, and Banco Consorcio, sold both CPI-linked and nominal bonds this month.

The yield on the peso bond due in 2030 dropped about 90 basis points in the past two weeks, reaching its lowest since Sept. 2021, while the CPI-linked note of the same maturity fell more than 40 points.

“The better mood in the local market increased demand for Chilean bonds, offering a good opportunity for issuance,” said Diego Pino, head of credit and equity trading at Scotiabank Chile. “We’ll probably see more corporate sales in coming weeks.”

ECONOMIC CALENDAR:

Chile:

International

  • U.S.:

    • Nov. 23: Oct. Durable goods orders

    • Nov. 23: Nov. S&P Global PMI

    • Nov. 23: Nov. U. of Michigan Sentiment

    • Nov. 23: Oct. New home sales

  • Eurozone:

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