In general terms, the Chilean economy has evolved in line with forecasts in the March Report. Activity has been resuming a path of growth consistent with its trend, with demand performing somewhat better than expected. Inflation is around 3.5% annually and two-year expectations remain at 3%. On the external front, developments continue to be dominated by the adjustment of expectations for monetary policy in the United States. Going forward, local inflation is expected to see a significant rebound and converge to the target in the first half of 2026. This is influenced by the impact of the supply shock associated with higher electricity costs and a higher boost in domestic demand, which is partially offset by the lower real exchange rate (RER) projected with respect to March assumptions. For activity, the contractionary effect of energy costs on the real income of households is contrasted with the greater dynamism from domestic spending, which is expected to go hand in hand with the improvement of its fundamentals, including a higher projection for the copper price. The Board estimates that, if the assumptions in the central scenario materialize, the monetary policy rate (MPR) would have accumulated during the first half of the year the bulk of the MPR cuts foreseen for this year. The central scenario of this Report considers that the MPR will be reduced further over the monetary policy horizon, at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the inflation trajectory.

As projected, activity has been increasing. In the first quarter, the deseasonalized GDP series posted a new advance with respect to the previous quarter (1.9%). As foreseen in the latest IPoM and was confirmed by the Imacec indexes of March and April, part of this growth came from supply-side factors that have been reversing.

The economy continues to show heterogeneity across sectors. The dynamism of the service sectors continues to stand out, which is coupled with the rebound in some branches of retail and wholesale trade. The weakness of construction remains the main counterpoint, with activity levels that remain low. Meanwhile, the greater boost in exports has favored the performance of some activities linked to the external sector, which has been influenced by the increase in international prices of certain products, among other elements (figure 1).

Discounting inventories, domestic demand has been regaining momentum. Its performance in the first quarter exceeded expectations, especially in consumption. Household spending has recovered gradually in the context of increases in employment and real wages, which have been supporting the growth of the wage bill. The services component remains the most dynamic of private consumption, which was compounded with greater demand for non-durable goods in the first quarter. Government consumption also grew more than projected (figure 2).

Although still weak, gross fixed capital formation (GFCF) halted the deterioration it showed during the second half of last year. Adjusting for seasonality, GFCF posted zero variation in the first quarter, reflecting a more stable behavior of both machinery and equipment and construction and works. Within the latter, the building segment was slower than engineering works, as confirmed by partial second-quarter information. In any case, every GFCF component contracted further on a year-on-year basis (figure 3).

The annual variation of the total CPI remained around 3.5%, while that of the core CPI (i.e. without volatiles) dropped from 4.2 to 3.5% between February and May¹/. In cumulative terms, the monthly variations of both measurements in recent months have been in line with expectations, which confirms that part of the high figures of early in the year obeyed to specific factors. By components of core inflation, the annual variation of the services part showed a significant decrease compared to the end of 2023 (from 7% in December to 5.3% in May), reflecting the indexation to lower inflation rates in a period of the year that concentrates adjustments to past inflation. Inflation expectations two years out remain at 3% (figure 4).

Banks’ lending interest rates have declined in line with the transmission of the reduction in the MPR, with banking credit showing a low dynamism. The latter occurs in a scenario of still weakening demand for credit, particularly the search for investment funding by firms. The supply conditions do not show changes in the margin, although they continue to be tight in some portfolios, which is influenced by factors such as a perception of greater risk on the part of the banks, in a context of worsening default indicators of individuals and firms. Overall, the behavior of commercial credit has been consistent with macroeconomic fundamentals, although it shows a certain slowdown that needs to be monitored (figure 5).

The shallow state of the local capital market due to pension fund withdrawals continues to affect the economy, especially by its impact on the availability of longer-term funding. Longer-term interest rates have increased their correlation with its external counterparties, which remain high, directly affecting the corporate and mortgage credit costs.

Abroad, United States activity continues to drive global growth, although other countries have also improved their performance so far this year. In the American economy, the strength of domestic demand, especially household consumption, continues to stand out. The rest of the world maintains lower dynamism, although several countries in the Eurozone and Latin America grew more than expected at the beginning of the year. All this results in a marginal upward correction of the average growth of trading partners expected between 2024 and 2026 (3.0%; 2.9% in March).

Global inflation has continued to decline. However, the figures of the service components still are a focus of attention, especially in the United States, beyond the deceleration of their indicators at the margin. Services inflation has declined more slowly than goods inflation in most countries, accompanied by tight labor markets in several of them. Regarding costs, the oil price has fallen in recent months, while international freight rates remain high, although below the values observed during the pandemic.

External financial conditions remain tight, particularly for emerging economies, in a context in which expectations about the monetary policy of the Federal Reserve (Fed) continue to dominate the movements of global financial markets. Central banks in several countries have lowered their policy rates but have been cautious in signaling future actions. At the same time, long-term interest rates are at high levels and have increased their sensitivity to changes in the outlook for the Fed’s next decisions. This occurs in a context of greater uncertainty about several more structural global factors, including increased defense spending —amid growing geopolitical tensions— and concerns about the sustainability of sovereign debts around the world, especially in the United States (figure 6).

In general, the local financial market has tended to follow global trends. However, the Chilean peso has had a more favorable evolution than other currencies compared to the last Report, in the context of a higher copper price. Since the March statistical close, the peso has appreciated nearly 5% against the dollar and more than 6% in multilateral terms (MER). In that period, the copper price accumulates an increase of around 11%. The latter brings together elements such as greater demand —especially from China— in the context of the energy transition and constrained supply (figure 7).

Projections

In general terms, the macroeconomic scenario has evolved according to forecasts, although domestic demand grew somewhat more above expectations in the first quarter. The Chilean economy has been recovering a growth path in line with its trend, and inflation has continued to decline, while two-year inflation expectations remain at 3%. With respect to March, news in the central projection scenario is the best starting point of domestic demand, which will be sustained by a copper price hike, and the adjustment of electric rates, which will have a significant impact on inflation, particularly in 2025.

The central scenario assumes that the copper price will average US$4.3 per pound in 2024-2026, exceeding the March assumption of US$3.85. Estimates are that more than half of the increase accumulated in the copper price over this year is explained by more persistent factors (figure 8). Projections include a positive impact of this adjustment in several dimensions, including investment, agents’ expectations, and the current account balance.

On the other hand, new information is incorporated on the adjustment of electricity rates for regulated customers for the coming quarters. Based on the official antecedents after the publication of the Law on stabilization of power rates and the Preliminary Technical Report of the National Energy Commission, it is expected that the increase in electricity rates will contribute 1.45 percentage points (pp) to the accumulated variation of the CPI as of June 2025. The main impact is concentrated in the value of electric bills included in the volatile component of the CPI (table 1 and 2). The inflation expectations implicit in the prices of financial assets and the reports of some market actors began to consider this factor in the days prior to the publication of this Report.

Headline inflation projections rise significantly, particularly for 2025. This is influenced by the impact of the supply shock associated with higher electricity prices and a greater boost in domestic demand. The outlook for core inflation considers limited indirect effects of the utility rate update, which refer to cost adjustments in firms with regulated rates and usual price and wage indexation processes. The projections for that component also include the impact of increased spending driven by the external sector. Part of these effects is offset by a RER that, compared to March, is adjusted sooner and converges to more appreciated levels throughout the projection horizon. This has a downward impact, especially on the projected inflation of goods.

Thus, the projection considers that annual inflation would close 2024 at 4.2% (3.8% in March). In 2025, it would culminate in 3.6% (3.0% in March), and average inflation would be 1.1pp higher during that year. Its convergence to 3% will occur in the first half of 2026 (figure 9). Reducing inflation assumes that the transmission of the electricity cost shock will operate according to usual patterns. In addition, it considers some downward adjustments to rates starting in the second half of 2025.

For activity, the scenario contains limited changes compared to March. For this year, GDP is expected to grow between 2.25% and 3.0%. The adjustment with respect to the previous range (2.0%-3.0%) is explained by better actual data on the spending side and the initial reach of the rise in the price of copper. Into the medium term, the effects of this latter element are offset by the negative impact that the adjustments in the electric bills have on households’ disposable income. This influences the maintenance of the growth range between 1.5 and 2.5% for 2025 and 2026.

The demand estimate includes an improvement in GFCF projections. The revision to the copper price raises the prospects for mining investment, mainly in the next two years, which also has positive effects in other sectors. Other factors are added: for the immediate term, the smaller GFCF contraction expected in 2024, especially in the machinery and equipment component, in line with the assumption of a lower RER and lately the somewhat better performance of imports of these goods. In the medium term, financial conditions that will improve and the information from the latest survey of the Capital Goods Corporation are added, which includes 10% more investments for the period 2024-2027.

Consumption growth forecast is increased for this year and has few adjustments for the period 2025- 2026. The labor market’s evolution will continue to sustain the performance of the wage bill, in accordance with the progress of the business cycle, together with the contribution from the improvements in the aforementioned fundamentals. In the medium term, the contractionary effects of the increase in the electric bills will reduce the growth pace of private consumption. For the public component, a moderation of its expansion rates is expected for 2025 and 2026, according to the latest Public Finance Report (table 3).

Monetary policy

The Board estimates that, if the assumptions in the central scenario materialize, the MPR would have accumulated during the first half of the year the bulk of the MPR cuts foreseen for this year. In nominal terms, this trajectory is somewhat above assumptions in the latest IPoM. However, the real MPR of the current central scenario is lower than the one implicit in March scenario for the short-term, although similar on average for the next two years. This is consistent with the inflation targeting monetary policy framework, which allows supply shocks to be accommodated in the policy horizon and thus cushion their impact on activity, demand and employment.

The central scenario of this Report considers that the MPR will be reduced further over the monetary policy horizon, at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the inflation trajectory.

There are scenarios where monetary policy could follow a path other than the central scenario, which are reflected in the MPR corridor. In this Report, the upper bound could occur in a scenario of more persistent than expected inflation. This could be the case if demand showed a greater boost than anticipated, or alternatively, if the electricity rate shock had more permanent effects on inflation; for example, hand in hand with greater second-round effects that reinforce the mechanisms of inflationary persistence. The lower bound, which assumes lower inflationary pressures, could occur if the impulse of the increased copper price on domestic demand was more moderate or if the contractionary effects of the aforementioned tariff adjustment on consumption were stronger. It could also occur in a situation of longer-lasting weakness of the most lagging economic sectors (figure 10).

The current scenario gives more flexibility to monetary policy than in previous quarters, particularly due to the resolution of macroeconomic imbalances, the decline in inflation and inflation expectations aligned with the target. The Board will safeguard the compliance with the inflation target, evaluating, on the one hand, that the spread of the shock associated with electricity rates is as expected and that inflationary persistence does not increase. On the other hand, that monetary policy properly supports the economy when it has entered a process in which its growth is little by little approaching levels consistent with its trend and the labor market has improved.

¹/ For the purposes of macroeconomic analysis and the conduct of monetary policy, the Board uses the series with base year 2023, called the reference CPI, which considers information from the new basket only. For price-level restatement purposes of indexed contracts, bonds or securities, the annual variation of the CPI reported by the National Statistics Institute (INE) is used. This combines the CPI base 2018 and base 2023. As of May, it showed an annual increase of 4.1%.