As had been anticipated, the strong dynamism of activity early in the year was reduced, which was partly associated with the reversal of some transitory elements. However, this moderation was somewhat greater than was foreseen in the previous IPoM, influenced by the deterioration of private consumption. Headline inflation rose to 4.4% annually in July, largely due to the anticipated effect of higher electricity prices, while core inflation (without volatile items) remains close to 3.5% annually. Inflation expectations have risen in the short term but remain anchored to the two-year target of 3%. For this year, the growth projection range is reduced in its upper bound and the expected increase in demand is corrected downwards. For 2025 and 2026, the economy is still considered to grow around its trend. This is consistent with the performance of its main fundamentals, including the labor market on the consumption side and the boost of large-scale mining projects on the investment side. In any case, the recovery in spending will be somewhat slower than expected in June. In the short term, volatile elements push up the overall inflation projection. However, the reduction in inflation will be faster because of lower demand pressures. The impulse that the Chilean economy will receive from abroad is similar to what was considered in June, although global financial conditions will be somewhat better thanks to the change in the expected trajectory of the interest rate in the United States. The combined information available suggests modest changes in the outlook for activity, although spending shows greater weakness. This, together with inflation expectations in line with the 3% target, reduces the risks of further inflationary persistence in the medium term as a result of the cost shock. The Board estimates that, if the assumptions of the central scenario of this Report materialize, the reduction of the monetary policy rate (MPR) towards its neutral level will be somewhat faster than expected in June. This will occur at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the path of inflation.

Activity lost momentum in the second quarter. Part of this reduction was expected, given that the dynamism of early 2024 was affected by transitory factors. However, the magnitude of the reversal was somewhat greater than expected. The seasonally adjusted series of total and non-mining GDP decreased 0.6% in that period, contrasting with the slight increase predicted in the previous Report. Part of the difference was explained by the decline in service-related activities and another part by the influence of some specific supply elements, linked to the availability of fishing resources in the industry, the effect of severe climatic episodes and the maintenance downtime in mining works. July’s Imacec showed a significant acceleration of activity month on month, although once again a significant part was due to these transitory factors, in a context where the figures have shown high volatility.

Demand also underperformed in the second quarter, explained by private consumption. Household spending on non-durable goods and services declined, breaking the upward trend of previous quarters. This behavior occurs in a context in which, in recent times, several of its fundamentals have evolved in line with what was expected.

Gross fixed capital formation (FBCF) stabilized after falling sharply in the second half of last year. The GFCF exhibited a better-than-expected performance in the second quarter of this year explained by both the construction and other works component and machinery and equipment. However, high-frequency indicators reveal important differences across sectors, contrasting the weakness observed in most sectors with the dynamism of investment in mining.

Total headline inflation rose to 4.4% in July, while core inflation has hovered around 3.5% (reference series). The higher total inflation compared to what was forecast in the last Report was associated with volatile items, mainly due to the increase in the electric bills and the prices of goods included in that CPI measure. On the core side, annual inflation of services continues to exceed that of goods. The evolution of the latter once again reflects a moderate pass-through of the exchange rate and international freight cost increases of recent months.

Market inflation expectations show a sharp contrast between short and medium term. According to financial asset prices, at one year there was a significant increase (+90 basis points (bp) from the previous IPoM), while at two years they remain aligned with the 3% target. As for expectations for MPR, at one year they fell by 30bp since the last IPoM, a decrease that was smaller at two years. This is in line with the fall in real interest rates that has been observed for some months now. 

The MPR cuts have continued to be passed through to bank lending rates, in accordance with the usual patterns. Interest rates on commercial loans have fallen by 630bp compared to the first quarter of 2023, while consumer rates have decreased 350bp. Mortgage rates —which are less related to the MPR adjustments— have seen a much milder decline: around 20bp with respect to its peaks of late 2023. Long-term interest rates have declined since the end of June, matching the trends of the major economies. Even so, they remain high by historical comparison. 

Bank credit remains weak, especially its commercial component, amid access conditions to financing without major changes. In that portfolio, the result is consistent with the behavior of sectoral investment, which is dynamic for mining, which uses Foreign Direct Investment more intensively to finance itself, and weaker in the other sectors that are more intensive in the use of bank credit. In any case, considering all the sources of financing for firms, the observed patterns of behavior are similar to those of other economies. 

Internationally, news from the United States continue to dominate. The last few weeks have been marked by the markets’ assessment of this economy’s growth and the actions of the Federal Reserve (Fed). After the Fed signaled the imminent start of the Fed funds rate (FFR) cutting cycle, short- and long-term rates have declined in the main economies and the dollar has depreciated globally. Market expectations for the number of Fed funds rate cuts this year went from two in June to around four at the close of this IPoM. 

The Chilean peso has followed the movements of global markets, responding to the volatility of the external scenario. From June to early August, the exchange rate posted a significant depreciation, affected by the evolution of external conditions that influenced the copper price and the markets’ risk perception. Most recently, the peso has strengthened, amid the worldwide weakening of the dollar and the recovery of copper prices after a few weeks of declines. Thus, a comparison of the statistical cut-off of this and the previous IPoM shows only minor differences.

Structural parameters 

The estimate of non-mining trend growth presents no big changes with the previous figure. Average growth in the period 2025-2034 is estimated at 1.8% annually. 

The estimate range of the nominal neutral MPR remains between 3.5 and 4.5%. As a working assumption, a value of 4% is used. After the upward revision of this parameter in the last two updates (December 2022 and December 2023), on this occasion the methodologies used maintain the previous range of estimates, which factors in the degrees of uncertainty surrounding this parameter. This assessment is consistent with recent reviews in other economies. 

Projections

Projections for activity and demand continue to assume that the economy will grow around its trend during the coming years. In 2024, the range for the GDP growth projection is reduced in its upper bound, being between 2.25 and 2.75% (2.25% to 3.0% in June), a revision that responds largely to the second quarter’s result. For 2025 and 2026, growth projections are kept within the 1.5% to 2.5% range. 

Private consumption will regain momentum, but its level at the end of the projection horizon will be less than previously estimated. The evolution of several of its fundamentals —such as the lower cost of credit and the increase in the real wage bill— suggests that its recent moderation will not be persistent. However, employment growth has slowed at the margin, something that should be carefully monitored. Towards 2025 and 2026, private consumption is expected to grow at about 2% per year, in line with trend growth. The expansion of government consumption is also revised downward, especially for this year, in line with the projections of the last Public Finances Report, responding to the requirements of the structural balance target. The lower expected level of consumption over the projection horizon affects the activity gap and reduces inflationary pressures. 

The GFCF growth projection for the 2024-2026 period is somewhat down from the June estimate, reflecting weak investment in the non-mining sectors. For the mining industry, the central scenario confirms the greater boost of investment. This would have a positive impact on the activity of other sectors, especially construction. Among fundamentals, GFCF performance will benefit from steadily improving financing conditions and the appreciation of the real exchange rate (RER) over the projection horizon, consistent with easing external financial conditions as the cycle of FFR cuts unfolds. 

Projected headline inflation is raised for the short term, mainly because of the sharper rise in volatile components. A fraction of it responds to the direct and indirect effects on the CPI of the higher increase in electricity rates that took place in June and July. Added to this is the impact of the increase in global maritime freight rates and the depreciation of the peso in recent months. By the end of this year, headline inflation is expected to close at 4.5% (4.2% in June). 

Towards the medium term, inflation will see a faster decline than was foreseen in June, given the reduced inflationary pressures associated with the behavior of domestic demand. Its convergence to the 3% target is foreseen in the early months of 2026, to remain around this value until the end of the projection horizon.

The estimated impulse that the Chilean economy will receive from abroad is similar to what was indicated in June. This considers a trading partners’ growth without major changes with respect to the previous projection —of the order of 3% in the 2024-2026 period—, somewhat better international financial conditions and somewhat lower terms of trade. The copper price estimate is slightly lowered with respect to the previous assumption. For 2024, this price is foreseen at US$4.15 per pound (US$4.3 in June), and for 2025 and 2026 both estimates remain around US$4.3.

Monetary policy 

The combined information available suggests modest changes in the outlook for activity, although spending shows greater weakness. This, together with inflation expectations in line with the 3% target, reduces the risks of further inflationary persistence in the medium term as a result of the cost shock. The Board estimates that, if the assumptions of the central scenario of this Report materialize, the reduction of the MPR towards its neutral level will be somewhat faster than expected in June. This will occur at a pace that will factor in the evolution of the macroeconomic scenario and its implications for the path of inflation. 

The sensitivity scenarios —i.e., the borders of the MPR corridor— are related to the evolution of the domestic economy. The lower part may be seen in a situation in which the weakness of activity and demand in the second quarter is prolonged and/or deepened due to various factors, including a weaker labor market. This would have downward impacts on inflationary pressures greater than those assumed in the central scenario, leading to a faster reduction of the MPR. The upper limit could occur if the rise in inflation turns out to be more persistent than expected or if its second-round effects exceed expectations, which could be accentuated by the dynamism of mining investment and the additional impulse this would have on the activity of several sectors and demand. There are also scenarios in which the evolution of the international outlook differs from the central scenario. In particular, the speed at which the Fed reduces its interest rate would affect global financial conditions, with repercussions on the local economy that would keep the MPR within the limits of the corridor. 

The main risks —i.e., developments that are less likely to occur, but which would have stronger impacts on the economy— are linked with international context, where the probability of negative geopolitical and financial scenarios has increased. The world’s geopolitical situation has worsened on different conflict fronts and episodes of risk aversion in financial markets, although temporary, have been pronounced. This has increased the likelihood of contractionary and inflationary scenarios in the short term, in a context of intensified global cost pressures. The fragility of the fiscal situation in several developed countries, especially in the United States, is also a source of risk that should be monitored.