Chile's Economic Resilience and the Strategic Case for a December Rate Cut

Chile's economy has demonstrated remarkable resilience in the face of global headwinds, including U.S.-China trade tensions and geopolitical instability in the Middle East. As the Central Bank of Chile prepares for its December 2025 monetary policy decision, the strategic case for a rate cut hinges on balancing moderate GDP volatility with inflation expectations that remain cautiously anchored. This analysis examines how the bank's policy response reflects a nuanced approach to sustaining growth while managing inflationary risks.

A Resilient Growth Trajectory Amid External Uncertainty

Chile's GDP growth projections for 2025 have been revised upward to a range of 2.25% to 2.75%, driven by robust exports-particularly in copper-and rising domestic demand, including higher consumer spending and real wages. The Central Bank of Chile's December 2025 monetary policy statement underscores that economic activity is expected to evolve around its trend, with volatility remaining moderate in the near term. This resilience is attributed to the country's diversified export base and strong institutional frameworks, which buffer it against external shocks. However, risks persist, notably from U.S. tariff policies that could disrupt key export sectors as indicated in the OECD report.

The bank's cautious optimism is tempered by global uncertainties. While the U.S.-China trade conflict and Middle East tensions have not yet translated into significant domestic spillovers, the Central Bank remains vigilant. As stated in its December report, "the Chilean economy is expected to remain resilient, with limited direct impact from these external shocks." This assessment reflects confidence in Chile's structural strengths but also highlights the need for proactive policy adjustments to safeguard growth.

Inflation: A Gradual Path to Target

Inflation expectations remain a critical focus for policymakers. The Central Bank notes that inflation has evolved in line with forecasts, with annual average inflation projected at 4.4% for 2025-slightly higher than earlier estimates due to electricity tariff adjustments and energy costs. Core inflation, which excludes volatile items, remains elevated at 3.9%, though on a downward trajectory as reported in the March 2025 report. The bank's target of 3% is expected to be achieved by early 2026, supported by anchored inflation expectations and a gradual decline in headline inflation as detailed in the December report.

This trajectory reflects a delicate balancing act. While headline inflation has eased, core inflation and transitory supply-side pressures-such as supply chain disruptions-necessitate a measured policy response. The bank's March 2025 Monetary Policy Report emphasized that "the policy rate will remain at 5% to ensure inflation returns to target," but this stance shifted in July when the rate was cut by 25 basis points to 4.75% amid growing concerns over external risks and a slowing labor market.

Strategic Rationale for a December Rate Cut

The December 2025 rate cut, if implemented, would follow a strategic rationale centered on three pillars: mitigating external risks, supporting domestic demand, and maintaining inflation control.

1. External Risk Mitigation: The U.S. tariff measures on Chilean copper-a critical export-have introduced uncertainty into the external environment. By reducing the policy rate, the Central Bank aims to offset potential export slowdowns by stimulating domestic demand and preserving growth momentum as outlined in the bank's policy area.

2. Domestic Demand Support: With household consumption projected to grow in 2025, supported by job creation and rising real wages, a rate cut could amplify these positive trends. Lower borrowing costs would encourage investment and consumption, particularly in sectors like housing and small businesses as highlighted in the OECD economic outlook.

3. Inflation Management: While inflation expectations remain anchored, the bank must avoid over-tightening. A rate cut in December would signal a shift toward a neutral policy stance, aligning with the bank's projection that the Monetary Policy Rate (MPR) will approach its neutral range over the coming quarters as stated in the December report. This approach balances growth support with inflation containment, avoiding the risks of a protracted high-rate environment.

Implications for Investors

For investors, Chile's December rate cut represents a strategic pivot toward growth-oriented policy. The move signals confidence in the economy's resilience while acknowledging the need to address external vulnerabilities. Equities in export-sensitive sectors, such as copper producers, may face near-term headwinds from U.S. tariffs, but a lower policy rate could buoy domestic consumption-driven stocks. Additionally, the Central Bank's commitment to inflation control reduces the risk of abrupt policy reversals, offering stability for long-term investments.

Fixed-income markets may also benefit. A rate cut would likely widen the yield differential between Chile and higher-yielding emerging markets, potentially attracting capital inflows. However, investors should monitor inflation data closely, as any signs of reacceleration could prompt a policy reversal.

Conclusion

Chile's Central Bank faces a complex but manageable challenge in December 2025: sustaining growth while guiding inflation toward its 3% target. By leveraging a rate cut, the bank aims to navigate external uncertainties and support domestic demand without compromising its inflation mandate. For investors, this policy shift underscores Chile's economic resilience and provides a strategic opportunity to engage with a market poised for balanced growth.