The domestic economy has weakened over the course of the year, with domestic demand slowing during the second quarter. This occurred alongside a deterioration in labor market conditions, a decline in confidence indicators, and the negative effects of higher fuel prices on the income of firms and households. Thus, while the impact of supply-side factors predominated in GDP performance at the beginning of the year, its recent evolution has also reflected weak domestic spending. Inflation has followed a path consistent with the projections in the June Monetary Policy Report (IPoM), significantly influenced by fuel prices amid the conflict in the Middle East. Regarding the projections, the main changes in the central scenario are concentrated in the local economy. For 2026, the GDP growth outlook has been revised downward relative to June, from 1.0-1.75% to 0.25-0.75%, owing to the effects of weaker demand, the consequences of adverse weather conditions on several sectors during the current quarter, and lower mining production. Starting next year, the implementation of the Reconstruction Act is expected to provide additional support for economic activity, primarily through investment. The inflation forecast shows no significant changes, reflecting the combination of a cost shock that remains relevant and a weaker demand in the short term, although spending is expected to recover within the forecast horizon. Headline inflation is projected to reach levels around 3% in the second quarter of 2027. The Board estimates that it will need to continuously assess alternative scenarios in which the response of the global and domestic economies could lead to inflation trajectories different from those expected and could require changes in monetary policy. Accordingly, the future path of the Monetary Policy Rate (MPR) will be assessed on a meeting-by-meeting basis based on how events unfold.

In general, inflation figures in recent months have been consistent with the projections in June IPoM. Annual change in the headline CPI has fluctuated around 4%, while that of the core measure, excluding volatile items, has remained between 3.2% and 3.4% (Figure 1). Largely, inflation has continued to be driven by higher fuel prices, with their pass-through to other prices following historical patterns. Two-year inflation expectations stand at around 3% annually according to different measures.

Economic activity remained weak in recent months. In the second quarter, the annual growth of total and non-mining GDP stood at -0.2% and 0.7%, respectively (-0.3% and 0.2% in the first quarter), both below the projections in June IPoM. During the same period, measured in seasonally adjusted terms, total activity remained unchanged relative to the previous quarter, while non-mining activity declined by 0.1%. In July, the Monthly Index of Economic Activity (Imacec) posted an annual contraction of 1.5%, largely reflecting lower mining production and the impact of adverse weather conditions on several sectors.

Whereas the weakness of the economy at the beginning of the year was mainly explained by supply-side factors, more recently a slowdown in domestic demand has been observed in both the public and private components. Annual growth in local spending declined from 2.3% to 0.1% between the first and second quarters, reflecting lower growth rates in both gross fixed capital formation (GFCF) and private consumption. Fiscal spending also posted more moderate growth in recent months (Figure 2).

In the case of private spending, its performance occurred alongside a deterioration in some of its fundamentals. Among these, business and household confidence indicators declined sharply from late in the first quarter onward, affected by both domestic and external factors. Added to this is the impact of higher fuel prices on income, which also affects expectations. Nevertheless, some indicators have shown a modest pickup at the margin, including the IMCE and the IPEC (Figure 3).

A deterioration in employment has also been observed, affecting household income. Indeed, the latest data from the National Statistics Institute (INE) show a loss of jobs, particularly in the formal sector, with the unemployment rate rising to 9.5% (9.3% in seasonally adjusted terms) (Figure 4). This has led to slower real growth in the wage bill.

Overall, the Chilean labor market has continued to exhibit weak performance in the post-pandemic period, as a combination of persistent and cyclical factors. As noted in previous Reports, part of this is explained by the significant increase in labor costs over recent years. Additional evidence points to the role of the automation process, driven by the high exposure of certain occupations to these changes and by a decline in the relative cost of technology compared with labor. Regarding cyclical factors, weaker domestic demand has also weighed on employment, particularly in more labor-intensive sectors such as construction.

GFCF was affected by the persistent weakness of the real estate sector, the completion of several large-scale projects, and the postponement of investment decisions. The latest Business Perceptions Report (IPN) indicates that a share of firms delayed their investment projects in response to the deterioration in economic conditions during the second quarter and while awaiting the approval of the Reconstruction Act, which remained under legislative review until a few weeks ago. This was compounded by a significant decline in public investment spending during the first half of the year.

Nevertheless, the outlook for GFCF remains favorable. The latest survey conducted by the Chilean Capital Goods Corporation (CBC) reported a 15% increase in the total amount of investment projected for the 2027-2028 period. This comes in a context where copper prices remain at elevated levels and the medium-term copper price assumption has been revised upward, while the Reconstruction Act is expected to provide a boost to private investment (Figure 5).

Developments related to the conflict in the Middle East continue to dominate the external scenario, with hostilities escalating in the days leading up to the statistical cut-off date for this IPoM. Beyond the recent increase, oil price projections show little change compared to June. An oil price of US$79 per barrel (Brent-WTI average) is assumed for the 2026-2028 period, compared with US$81 in the previous IPoM (Figure 6).

Global economic activity continues to be supported by the boom in artificial intelligence (AI). This has particularly benefited countries that play a more prominent role in the technology value chain, leading to upward revisions to growth forecasts in several Asian economies. It also explains much of the dynamism of activity in the United States (Figure 7).

However, there are growing concerns about the ability of AI-related companies to sustain the current high pace of investment, particularly in a context where their debt levels have increased. These concerns have contributed to greater volatility in technology stock prices, exceeding that observed in other equity segments.

The increase in oil prices, together with global resilience and the communication of some central banks, has renewed concerns about inflation and reinforced expectations of a more restrictive monetary policy stance worldwide. Over the remainder of the year, policy rate increases are anticipated in Europe, where rates were already raised in June, as well as in the United Kingdom, the United States, and several other economies.

This, coupled with competition for the resources needed to finance massive AI-related investments, has contributed to the rise in long-term interest rates. In recent weeks, these rates have climbed to levels not seen in several decades (Figure 8). This increase comes amid a surge in corporate bond issuance to finance AI investments and growing fiscal financing needs across developed economies.

PROJECTIONS

The main changes in the central scenario are concentrated in the domestic economy. For 2026, weaker domestic spending, the adverse effects of weather conditions on several sectors during the third quarter, and lower mining production will converge. As a result, the GDP growth forecast range is revised downward from 1.0-1.75% to 0.25-0.75%. Consumption and GFCF are projected to close 2026 with annual growth rates of 1.7% and -0.3%, respectively (both 2.2% in the previous IPoM).

The central scenario incorporates the approval of the Reconstruction Act. Under this scenario, the Act is assumed to provide a significant boost to investment starting next year, supported by other measures aimed at promoting this component of demand that have been implemented in recent years. Higher investment would contribute to improvements in the labor market and confidence, thereby supporting private consumption. Overall, the projection incorporates approximately 0.5 percentage points of additional annual growth in both 2027 and 2028 because of the Act. Nonetheless, its implementation process could result in a macroeconomic impact that differs from what is currently anticipated.

Against this backdrop, the economy is expected to return to higher growth rates starting next year. This projection also assumes that the supply-side factors that affected activity during the current year will gradually dissipate and that there will be no significant disruptions stemming from weather-related events. On the fiscal front, for 2027 and 2028 the central scenario incorporates the nominal committed expenditures reported in the latest Public Finance Report.

In this context, GDP growth is projected to range between 2% and 3% in 2027 and between 2.25% and 3.25% in 2028 (compared with 2-3% and 1.75-2.75%, respectively, in June IPoM) (Figure 9). Under the central scenario, both GFCF and private consumption are expected to return to stronger growth rates than those recorded in 2026. GFCF is projected to increase by 8.1% in 2027 and 7.1% in 2028 (compared with 5.0% and 3.2%, respectively, in June), while private consumption is expected to grow by 2.1% and 2.7% in 2027 and 2028, respectively (compared with 2.0% and 2.2% in June).

The external boost to the Chilean economy shows little change relative to the June projections. In the central scenario, global growth and that of Chile’s trading partners are projected to remain around 3% over the 2026-2028 period, broadly in line with the previous IPoM. The expected evolution of the terms of trade is more favorable, mainly reflecting improved forecasts for copper prices. At the same time, international financial conditions are expected to become somewhat tighter because of higher interest rates.

Headline inflation forecast remains slightly above 4% at the end of 2026 and continues to anticipate convergence toward levels around 3% in the second quarter of 2027. For the core measure, estimates remain close to 3% throughout much of the projection horizon (Figure 10).

In the near term, inflation behavior is expected to be shaped by the interaction of the opposing effects of weaker demand pressures and cost shocks that remain significant. The forecast once again assumes that these shocks will be transmitted in line with historical patterns and that the real exchange rate will converge to its long-term levels over the coming quarters. Relative to the assumptions made in June, the projection incorporates, on the one hand, stronger growth in hourly wages based on the latest data and higher expected prices for refined petroleum products in international markets. On the other hand, it assumes that the weak performance of domestic demand will help contain these increased cost pressures.

MONETARY POLICY

The macroeconomic scenario remains subject to a higher-than-usual degree of uncertainty. On the one hand, the risks associated with the conflict in the Middle East remain present and have even intensified recently. On the other hand, although the domestic economy is expected to regain momentum toward 2027, it cannot be ruled out that its current weakness may prove more persistent than anticipated. The Board estimates that it will need to continuously assess alternative scenarios in which the response of the global and domestic economies could lead to inflation trajectories different from those expected and could require changes in monetary policy.

Accordingly, the future path of the MPR will be assessed on a meeting-by-meeting basis based on how events unfold. The Board reaffirms that it will make every decision necessary to meet its objective of ensuring that projected inflation stands at 3% over a two-year horizon.

Regarding the MPR corridor, its lower bound is associated with a weaker-than-expected recovery in domestic demand. This could occur if the boost from investment proves smaller than considered, affecting the labor market cycle and confidence. This would imply lower medium-term inflationary pressures than projected, making necessary a lower MPR over the policy horizon.

The upper bound of the MPR corridor corresponds to a situation where inflation is higher and more persistent than anticipated, which could occur if the cost shock and/or its spillover exceeds expectations. This could take place in a scenario where the economy is more dynamic, amplifying the second-round effects of the cost shock beyond expectations, reinforcing inflation persistence mechanisms. In this case, a more contractionary MPR would be required to ensure inflation converges to the target (Figure 11).