Chile's economy is broadly balanced, with real GDP expected to grow around its potential in 2025, supported by the recovery of domestic demand and continued growth in mining exports. However, the recovery has been uneven across industries, with the construction sector lagging and the unemployment rate remaining high. Inflation is projected to return to the 3% target in early 2026, after the impact of the significant electricity tariff hikes between June 2024 and early 2025 subsides. The current account deficit has continued to narrow and is projected to reach around 2.5% of GDP in 2024 and 2025. External risks and uncertainty remain elevated, including copper price volatility, prolonged high long-term interest rates in the U.S., and climate change. Domestically, concerns about crime, immigration, and inequality persist, while political polarization may further impede progress on much-needed structural reforms. Policies have supported macroeconomic stability, with the Central Bank of Chile lowering its policy rate by 325 basis points since January 2024 to 5% in December 2024, and the headline fiscal deficit is projected to reach 2.7% of GDP in 2024. The 2025 budget envisions a notable deficit reduction within a medium-term fiscal plan toward a broadly balanced fiscal position by 2027. The proposed new development bank requires a targeted mandate, sound risk management practices, and robust corporate governance. A pension reform is critical to ensure adequate self-financed pensions and reduce future fiscal costs, with key elements including raising contribution rates, improving coverage for self-employed and unemployed workers, and targeting the minimum guaranteed pension to the most vulnerable elderly. A cautious data dependent approach to the pace of future monetary policy rate cuts is warranted, with the real monetary policy rate close to its estimated neutral range. Rebuilding international reserve buffers is important for enhancing resilience, with gross international reserves declining slightly in 2024. The financial system remains resilient, despite greater risks related to the real estate sector and lower financial market depth. Banks are well-capitalized and maintain sufficient liquidity, with loans adequately provisioned and collateralized to withstand shocks. However, supervisors need to carefully monitor banks and insurers' portfolio quality and buffers, including by closing commercial real estate data gaps and enhancing stress test models.
