A government in a hurry; an economy in a daze
Growth close to its potential rate and a nearly balanced current account suggest that the Chilean economy is operating broadly in equilibrium. GDP rose 2.5% in 2025, above the preliminary 2.3% growth indicated by the Monthly Index of Economic Activity (IMACEC). The upside surprise was largely explained by upward revisions to H1 2025. Gross fixed capital formation remains one of the most dynamic components of GDP. Even so, its quarterly expansion has moderated, and remains driven largely by imported machinery and equipment, limiting its contribution to GDP.
January’s IMACEC pointed to a sluggish beginning to 2026. The sectoral composition was weak. Retail sales continued to lose strength at the margin; manufacturing data was particularly weak; and mining monthly readings remain soft.
Improving business confidence paused in February. Investment expectations remain relatively supportive, partly reflecting expectations around the election of President José Antonio Kast, who began his four-year term on March 11. The pattern is similar to the one observed ahead of the second Sebastián Piñera administration (2018-2022).
Trade data for February remained supportive. Even so, some moderation is likely in coming months, because of the recent deterioration in the terms of trade, with lower copper prices and higher oil prices.
Labor market data continues to point to weak performance. The seasonally adjusted unemployment rate has changed little recently, pointing to an equilibrium rate around current levels. Employment data tell a similar story.
Inflation data had until February been moving in a relatively favorable direction, although the signals were less benign than headline CPI readings suggested. The contrast was clearest in services. The picture has now dramatically changed: the inflation outlook now will be shaped mostly by oil prices, and peso value.
The domestic macro scenario until recently supported the view that one final 25 bp cut in the TPM remained possible. Recent events make that cut less likely, at least in the near term. Local interest rates inched higher, with a marked flattening bias along the curve, and inflation break-evens increased significantly. The cost of waiting appears limited, while uncertainty remains high, and the implications of the Middle East conflict are not yet fully known.
Kast is a man in a hurry. He has launched a swift sequence of decisions across some of the most sensitive areas of public policy: migration, education, public spending and the legacy of the 2019-2020 riots. The result is a set of measures that, taken together, seek to reshape the political landscape. Perhaps the most politically sensitive issue is his plan to consider pardons for military and police personnel convicted in connection with the protests. In raising this issue, Kast seems poised to reopen one of the deepest divides in Chilean society, returning to unresolved questions over the role of the state during the unrest.
Now read on...
Register to sample a report