Central banks around the world are under pressure. The relentless escalation of oil prices and their effect on prices globally, the growing public debt of the planet's largest economies, the aggressive incursion of Artificial Intelligence (AI) into markets, and geopolitical tensions are some of the ingredients in a complex menu to solve for the bodies in charge of setting the pace of interest rates. However, Chile's Central Bank (BC) has its own particular end-of-year puzzle to solve. In the most immediate term, the market's focus will be on the signal the BC delivers at its new monetary policy meeting that ends this Tuesday, October 27, just one day before the two-day meeting the US Federal Reserve will hold in Washington, where a monetary pause is expected following the first rate hike in three years decreed in September. While the expectation of markets in Chile is a hold of the benchmark interest rate for next week's meeting —at its current level of 4.5%— the BC board's meeting will be marked by new economic clues that will place special pressure on the message the monetary body delivers at its two-day meeting. But market interest will multiply for what is the last rate meeting of the year, scheduled for December 15, where the BC will have more data in hand on the progress of the economy's recessionary cycle and how misaligned inflation is relative to its target. "Today we are in a recession and the economy and employment show no clear signs of reactivation, inflation is rising and oil prices abroad keep climbing; the dollar, in turn, is approaching $1,000. All those elements complicate the decision-making picture the Central Bank has to face on rates," acknowledges in private a former economic authority with great knowledge of the governing body's dynamics. "If we only took into account the economy's stagnation, the recommendation would be to lower the rate, but if we considered that inflation will reach 5% toward year-end and that the Federal Reserve will keep raising rates in the coming months and in 2027, the option should be the opposite," summarizes the same source, illustrating the crossroads the Central Bank board faces. Santiago, July 13, 2025.
Reference images of the Central Bank located at Agustinas with Morandé streets in downtown Santiago.
Jonnathan Oyarzun/Aton Chile JONNATHAN OYARZUN/ATON CHILE The same dilemma and uncertainty are reflected in the market. While this week's Financial Operators Survey conducted by the Central Bank points to a hold of the benchmark rate for the next 24 months, the analysis of the distribution of the 62 responses provided by market agents marks a change from the September survey. While the previous month three specialists projected an interest rate increase in December, this month's survey showed that six agents were betting on an increase by year-end. For January, 14 operators project a rate increase, double that of a month ago. "We are at an important crossroads. Nobody wants to say it, but we are in a very complex scenario we have never been in before. We have an internal crisis at a time when there is no international crisis or recession… and it is like a stagflation. It resembles in some ways what happened in Japan in the early '90s," says Francisca Pérez, chief economist at Banco BCI, referring to the Japanese stagnation that lasted that entire decade. In an opinion column published this week on his personal blog, former Central Bank board member Pablo García recalls that Chile's BC has held the monetary policy rate at 4.5% since December of last year. "Before the war, the possibility being considered was a single reduction toward a neutral level, as inflation returned to the target. The outbreak of the war in the Gulf and the consequent rise in inflation shifted the balance of risks toward a possible hike in the second half of the year. Subsequently, as the economy showed more signs of weakening, the balance returned to a neutral level," recalls García, who points out that since September the news has been contradictory. This week's market close only confirmed the prevailing greater uncertainty and the complex panorama the Central Bank must face. While the international price of Brent oil hovered around US$117 a barrel and is on the verge of surpassing the high reached since the start of the war in the Middle East, the value of the dollar locally jumped nearly $9 on Friday and stood near the $1,000 barrier: it closed at $995.3. An "inflationary" recession Dragged down by the sharp contraction in mining and also by the consumption slowdown, a victim of the oil shock, national economic activity fell 1% in August, reaffirming the recessionary cycle the country is going through. "As for economic activity, the general figures for 2026 will undoubtedly be discouraging, even if the economy begins to improve gradually. A negative annual result would not be surprising, given the poor performance in mining production," describes Pablo García, who nonetheless highlights the recovery of the non-mining Imacec in the latest reading. As a counterpoint, and despite this recessionary scenario, inflation will continue to rise. So far this year, the Consumer Price Index (CPI) accumulates 4.1% over 12 months, and analysts' expectations are that it will reach a figure close to 5% at year-end, driven by the effects of the rise in the international price of oil and the so-called second-round effects. "Considering the significant and unexpected depreciation of the peso and the rise in short-term inflation expectations, the decision to keep the MPR (Monetary Policy Rate) at 4.5% should be accompanied by a hawkish (restrictive) bias. This contrasts with the neutral bias of the previous meeting and would be consistent with inflation closing the year between 4.5% and 5%, above what was projected in the last MP report (4.3%), as well as with the excessive depreciation of the peso," estimates Hermann González, macroeconomic coordinator at Clapes UC and former vice president of the Autonomous Fiscal Council (CFA). In a recent interview with Pulso, BCI's chief economist, Jorge Selaive, warned of a "very likely" unanchoring of inflation over the coming months, "which would force the BC, if that materializes, to raise the interest rate." "In supply shocks (from the rise in the price of oil) it is evident that central banks have to react less, but not reacting can be very complicated for credibility and for the anchoring of expectations. That is my main point," he said in early October. Alexis Ramirez Photography The most pessimistic view on the inflation trajectory generates debate in the market. "I do not see an imminent risk of unanchoring of inflation expectations. Inflation excluding volatiles remains near the target (3.2%), which is compatible with the ample slack with which the economy operates, while two-year inflation expectations remain around 3%. The main problem of the economy today is weak growth, not inflation. Consequently, I see no need at this time to raise the MPR," says Hermann González in turn. The economist Patricio Rojas acknowledges there is an uncomfortable scenario for the Central Bank, especially because the economy will have zero growth or a slight contraction in 2026, although he believes 24-month inflation expectations are relatively anchored and highlights that underlying inflation (excluding volatiles) is still at levels around 3%. "Raising the interest rate given the weakness of the economy would be counterproductive. Raising the interest rate over the inflation issue is also not justified, because inflation is fundamentally due to more volatile matters. My impression is that the Central Bank is in a difficult spot, but the option today is to wait and give some signal of transparency, in the sense of saying that many of these behaviors are the product of external factors," says the Rojas y Asociados economist, who expects the rate to be held at 4.5% at the BC's meeting this week. However, Rojas believes that if international turbulence subsides in the future, the Central Bank should evaluate a rate cut. Francisca Pérez of BCI goes further. She estimates that the economy's recovery in 2027 will be very slow and will fundamentally be a "rebound" from a low base of comparison. "If the Central Bank signals that it has to raise the rate because of a supply shock, the impact on activity could be greater, especially if we are in a significant crisis that has a lot of inertia. Expectations have not changed and the first thing we have to do to be able to change the pace of growth is to improve agents' expectations. The signal the BC has to give at this meeting is that there will be no rate hike, for the moment," recommends the specialist. The dollar dilemma Another ingredient that adds complexity to the scenario is the effect the rise in the exchange rate has had in the country and the Treasury's fear of a "thousand-peso dollar," given its effects on activity, inflation, and public finances themselves. As a sign of the Treasury's discomfort with the rise in the exchange rate, the Budget Office (Dipres) announced the sale of up to US$2.4 billion in the market until the end of October, with a limit of up to US$600 million per week. Finance Minister Jorge Quiroz himself has signaled that even an interest rate hike might be necessary to avoid a greater rate gap with the United States and greater pressure on the local exchange rate. 10/10/2026 - JOSE ANTONIO KAST WITH JORGE QUIROZ, VISIT TO THE CENTRAL BANK. Photo: Mario Tellez MARIO TELLEZ The market believes the Central Bank, in its end-of-year meetings, could also give a signal regarding the trajectory the exchange rate has taken. For now, they believe it should halt its program of accumulating international reserves (dollar purchases) announced in August 2025. The program contemplates daily purchases of up to US$25 million over a period of 3 years. With this, the Central Bank expects to accumulate around US$18.5 billion. "The BC could give an early signal that it will suspend that US$25 million purchase, although I do not believe it is in a position to announce an intervention policy, because it would not make much sense. All the factors influencing this are external and have to do with this interest rate differential the United States has with Chile," estimates Patricio Rojas. Hermann González also holds that the BC must give a signal on exchange rate matters. "The concern is understandable because the rise in the exchange rate, at times approaching $1,000, has been excessive. There are global factors behind this depreciation —such as the strengthening of the dollar and the rise in oil— but according to the evolution of the fundamental determinants of parity, it is not reasonable for the real exchange rate to be between 10% and 12% above its long-term equilibrium value. It would be valuable to know whether the Central Bank thinks the same, because the mere fact of mentioning it in the communiqué of the next meeting, along with the hawkish bias, could reduce the pressure on the peso," concludes the economist. Are you already a subscriber? 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