Chile is heading for monetary policy normalization in 2024.

Santander Chile’s team of economists is hopeful about signs for Latin America’s fifth largest economy. 

The Chilean economy was stagnant in 2023 but recent figures suggest that economic activity is beginning to pick up again.

We expect the economic activity to return to trend GDP growth rates in 2024 on the back of more favourable interest rates, lower inflation and a more stable political outlook. These factors will boost private consumption, and investment will also recover slowly.

A general relaxation of monetary policy expected from Chile’s central bank and counterparts around the world will have a positive impact. We estimate GDP to grow by more than 1% in the first half of 2024, hitting 2% by year end.

In 2022, geopolitical conflict, disruptions in global supply chains and the liquidity shock to Chile’s economy led inflation to peak at 14% in the third quarter.

However, a combination of tightened monetary policy by the Central Bank and a reduction in commodity prices has made a significant difference. By the end of 2023 the inflation was down to 3.9% and we expect it to hit policymakers’ target of 3% in the second quarter of 2024.

Falling inflation is being driven by more stable global prices and domestic demand, despite the job market and financial landscape remaining weak.

Chile’s Central Bank was one of the world’s first to introduce policy rate cuts when economic conditions worsened across the world in mid-2023, taking aggressive action to end the year at 8.25%.

Now, with inflation falling but the economy still fragile, we expect that the benchmark rate will continue to ease during 2024.

The speed and size of monetary policy rate (MPR) normalization will depend on local macroeconomic context, international risks,  and on decisions by the US Federal Reserve and other major central banks that could moderate or accelerate the pace of adjustment. In the base scenario, we expect MPR to be around 4.5% at the end of the year.