Monetary policy and the fiscal rule under strain
Activity continues sluggish. We therefore maintain our near-term interpretation of stable growth at close to potential, with a modest upside bias from improved sentiment. Business sentiment improved sharply in January 2026. But hard data released at the end of 2025 reinforces our cautious view. In December, the IMACEC rose 1.7% y/y, only partly reversing November’s -0.6%. Retail sales growth slowed to 4.5% y/y (from 5.8%); manufacturing output expanded a marginal 0.1% y/y; and mining remained the main drag, with production down 4.8% y/y. External accounts provide a more supportive backdrop, though not without caveats.
The labor market has since mid-year shown clearer signs of losing momentum. The seasonally-adjusted unemployment rate eased only 0.1 pp, and closed the year at 8.5%, unchanged from the same period of 2024. Employment dynamics look slightly better in the latest print, but the underlying tone remains soft. The composition is not especially reassuring.
Inflation fell below the Central Bank’s 3% target in January 2026, for the first time in almost five years. We expect a further drop in headline inflation during H1. The key rigidity remains in services, while the appreciation of the peso has not yet fully passed through to the CPI, except for faster rising items such as fuels.
The latest Monetary Policy meeting minutes frame the debate around whether the Board should fine-tune one final 25 bp cut. Moreover, the minutes anticipated a downward revision to near-term inflation projections; an adjustment rather than a change in scenario. By contrast, the activity-side argument points in the opposite direction. The renewed emphasis on the midpoint of the neutral-rate range once again raises questions about the Board’s reaction function. In our view, the next IPOM will deliver a meaningful downward adjustment to the inflation forecast, which, together with tactical considerations such as market expectations for the policy rate, could open a window for an additional cut as soon as March.
Chile’s once-consensual fiscal rule has become politically contested after the Budget Office released its latest report, which shows that the structural deficit has reached 3.55% of GDP, once again exceeding predictions. Expanding social spending has outpaced revenues, forcing repeated revisions and eroding credibility. The Gabriel Boric government defends such spending as a democratic necessity. The incoming José Antonio Kast administration, however, will seek gradual correction, and restoration of fiscal discipline, leading to a looming political showdown.
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