The landscape of global finance is constantly shifting, influenced by myriad factors that range from local economic indicators to broader geopolitical dynamicsIn recent weeks, the spotlight has turned to Chile, a country that is increasingly being eyed by investors as a potential candidate for the next wave of interest rate hikes among developing economiesFollowing Brazil's initiation of a rate hike in the previous year, fund managers from prominent firms such as Kinea Investimentos, Ace Capital, and Itau Asset Management have expressed their expectations that Chile might follow suitThis anticipation stems mainly from Chile's persistently high inflation and signs of economic recovery despite underlying uncertainties in the global economic climate.

Nonetheless, the situation in Chile is complexRecently released minutes from the Central Bank of Chile revealed a cautionary stance from economists who participated in a survey conducted by the central bankRather than predicting a rise in borrowing costs this year, these economists projected a pair of rate cuts over the next twelve monthsIntriguingly, this divergence in expectations raises questions about the actual trajectory of Chile's financial policy, especially in light of the central bank's insistence on taking all necessary measures to manage inflation, which remains above target levels.

Rodrigo Gazer, the founding partner and portfolio manager at Ace Capital, highlighted this conflict, noting, "Inflation is more stubborn than the central bank predicted, with recent hawkish meeting minutes suggesting that policymakers might even raise rates ahead of the September meeting." The impact of this sentiment was immediate and pronounced, as two-year swap rates surged by 16.75 basis points in a single day, marking the highest point for this rate in over nine months.

Through 2022, Brazil was among the front-runners in raising borrowing costs in the developing world, having increased interest rates by a substantial 275 basis points since September

Advertisements

Nigeria followed suit with its own rate hikes, trying to combat soaring inflation levelsThe critical question now being posed in financial circles is: who will be the next nation to tighten monetary policy?

With speculation swirling, Ace Capital recently asserted in an investment report that they believe Chile will likely be the next emerging market to embark on a renewed cycle of interest rate hikesTheir assertions stem from specific events, such as the Central Bank's unanimous decision late last month to hold borrowing costs steady at 5% for the first time since July of the previous yearThis decision was attributed to the depreciation of the peso and rising electricity prices, which have hampered the ability of inflation to retreat to the central bank’s target of 3%. However, just one week later, Chile's National Statistics Institute reported a strikingly high consumer price index, leaping by 1.1% in January alone—the fastest pace seen in nearly two years, pushing the annual inflation rate to 4.9%.

The minutes following this meeting were notably more hawkish than many had anticipated, indicating that the central bank is prepared to implement “appropriate measures” and signaling a willingness to adjust monetary policy direction upwards should conditions warrant such actionTheir expectation for inflation in the first half of the year hovered around 5%, which adds complexity to the situation.

Currently, swap rates are reflecting predictions of an increase of approximately 23 basis points within the next year, with a significant uptick in the one-year swap rates witnessed since the start of the year, exceeding 25 basis pointsThe influence of algorithmic traders is also noteworthy; as per Bank of America, traders adept at spotting market trends have been particularly active in Chile's interest rate curve, with many speculating on rising mid-curve swap rates.

Questions arise surrounding whether Chile’s interest rate curve could truly reflect a hike of 75 basis points

Advertisements

Golden Kaeman, from Standard Chartered's emerging markets sovereign strategy division, suggests it is plausibleHowever, he remains skeptical about exceeding that threshold, postulating that unless economic data deteriorates significantly, it is unlikely to happenThis uncertainty in the forecasting pattern is reflected in the differing opinions among local economists and traders who assess Chile’s economic outlook.

Marko Galardo, the Fixed Income Deputy Manager at BICE Inversiones, underscored the divergence in views, which primarily stems from varying expectations regarding inflation trends in the upcoming monthsHe pointedly remarked, "The market senses that the inflation phenomenon may persist for a longer duration." However, even among forecasters predicting rate cuts, general anxiety remains about how quickly lending costs may rise, particularly if expectations for inflation increase among economists surveyed.

The central bank’s proactive nature cannot be overlooked; there is a profound awareness among policymakers about the economic conditions that warrant swift actionA recent survey unveiled that traders have adjusted their forecasts for key interest rates for the next twelve months, shifting predictions from an anticipated 4.75% to a higher target of 5%. Moreover, the expectations for rate hikes in April notably shifted from nonexistent to approximately 7.7%, showcasing this growing momentum.

External influences play a vital role in shaping Chile’s economic landscape as wellThe Federal Reserve's decisions in the United States will significantly contribute to the backdrop against which Chile may choose its monetary policy routeGiven the increasing pressure on the Chilean peso amid rising trade barriers and a newly adjusted outlook for U.S. rate cuts, the allure of hiking rates in Chile also seems to intensify.

The recent underwhelming retail sales figures in the U.S. have seen Chilean swap rates dip from their recent highs, leading to significant declines in U.S

Advertisements

Advertisements

Advertisements