Chile's Inflation Trajectory and the Road to the December Rate Cut

Chile's Central Bank faces a delicate balancing act as it prepares for its December 2025 monetary policy meeting. The nation's inflation trajectory, while broadly aligned with the 3% target, exhibits mixed signals that complicate the case for easing monetary policy. Simultaneously, firming domestic demand suggests a need for accommodative measures to sustain growth. This analysis examines the interplay between inflationary pressures, economic activity, and the central bank's evolving strategy, offering insights into the likely timing and impact of a rate cut.

Inflation: A Tenuous Path to Target

Chile's annual inflation rate stood at 3.4% in November 2025, remaining within the Central Bank's 2%–4% target range. This figure, unchanged from October, reflects a broader disinflationary trend, with core inflation easing in recent months. However, the headline rate masks underlying volatility. For instance, consumer prices rose by 0.3% monthly in November, driven by spikes in clothing and transportation costs. Such fluctuations underscore the fragility of the disinflationary path, particularly as global energy prices and domestic supply chain adjustments remain unpredictable.

The Central Bank has maintained the monetary policy rate (MPR) at 4.75% since October, emphasizing the need for "additional economic information" before committing to further easing. This cautious stance is prudent given the risk of inflation rebounding. While the 3.4% annual rate suggests progress toward the 3% target, the board must weigh the possibility of upward surprises against the benefits of rate cuts for growth.

Domestic Demand: A Mixed Picture

Domestic demand has shown resilience, with Q3 2025 GDP growth reaching 1.6% year-on-year, driven by robust private consumption and investment. Real private consumption hit 32,996 billion Chilean pesos in Q2, supported by strong wage growth and expanding business services. Sectors such as health, education, and mining-related engineering services have contributed to this momentum.

However, industrial production has softened. In October 2025, the industrial production index fell 0.4% year-on-year, dragged down by a 0.8% decline in metallic mining-particularly copper output-and a 0.4% drop in manufacturing. This contraction contrasts with growth in non-metallic mining, where lithium carbonate production surged 4.7%. Such divergences highlight the uneven recovery in Chile's industrial base, with traditional commodity sectors lagging behind emerging opportunities in green energy.

The Central Bank's Dilemma: Easing or Waiting?

The Central Bank's December decision will hinge on reconciling these mixed signals. On one hand, inflation is trending toward the 3% target, and domestic demand remains a growth engine. On the other, industrial weakness and global uncertainties-such as China's slowing demand for copper-pose risks to the inflation outlook.

Markets anticipate a 25-basis-point rate cut, bringing the MPR to 4.5% by December. This expectation is rooted in the central bank's own acknowledgment of the need for "flexibility" in its policy framework. Yet, the board's October decision to hold rates suggests a preference for data-dependent policymaking. If inflation remains within the target range and domestic demand continues to expand, a cut is likely. However, any signs of inflationary acceleration-such as a rebound in core inflation or a surge in wage growth-could delay easing.

Implications for Investors

A December rate cut would signal the central bank's confidence in Chile's disinflationary trajectory and its commitment to supporting growth. For investors, this could have several implications. First, a lower MPR would reduce borrowing costs, potentially boosting corporate investment and consumer spending. Second, it might weaken the Chilean peso, which could benefit exporters but raise import costs. Third, the move could attract foreign capital seeking higher yields in a region where many central banks are tightening.

However, the mixed inflation signals and industrial challenges suggest that the rate cut should be viewed as a measured step rather than a dramatic shift. Investors should monitor the central bank's December statement for clues about the pace of future easing and its assessment of inflation risks.

Conclusion

Chile's December rate cut decision will test the Central Bank's ability to navigate a complex economic landscape. While inflation appears to be on track to meet its target, the firming domestic demand and industrial fragilities necessitate a cautious approach. A 25-basis-point cut would be a logical response to the current data, but the central bank's emphasis on flexibility underscores the importance of continued vigilance. For investors, the key takeaway is that Chile's monetary policy path will remain data-driven, with the December meeting serving as a critical inflection point.