Chile Cuts Interest Rate to 4.75% Amid Cooling Inflation, Rising Unemployment

Santiago, Chile – In a delicate balancing act for South America’s economic powerhouse, Chile’s Central Bank has cut its benchmark interest rate for the first time in 2025, reducing borrowing costs to 4.75% amid diverging pressures of cooling inflation and climbing unemployment. The 25-basis-point cut on July 29 marks a pivotal shift after six months of monetary stability, signaling policymakers’ growing concern over job losses despite hard-won gains against soaring prices.

Chile’s Monetary Crossroads: Taming Prices vs. Saving Jobs

The rate reduction comes as Chile’s inflation battle shows tangible progress. After peaking above 11% in 2023—driven primarily by surging electricity costs—annual inflation cooled to 4.1% by June 2025, nearing the Central Bank’s 3% target. Officials project further moderation through 2026, though energy prices remain stubbornly high. “We’ve turned the corner on runaway inflation,” notes economist Marco Morales of Universidad de Chile, “but new pressures demand attention.”

Yet this victory carries economic collateral damage. Aggressive rate hikes deployed in 2023–2024 successfully curbed inflation but simultaneously froze hiring. Unemployment now stands at 8.9%—a near 1% year-over-year increase—with nearly one in eleven Chileans jobless. Retail and public-sector contractions are primary drivers, failing to absorb workforce growth despite robust copper exports that historically fuel Chile’s economy.

The Human Cost of Economic Rebalancing

Behind the statistics lie strained households. María Inés Fernández, a Santiago retail worker laid off in May, voices a common refrain: “Food prices aren’t jumping like before, but without work, it doesn’t matter.” While wage growth offers relief to employed Chileans, the expanding job gap leaves many behind. The Central Bank acknowledges this imbalance directly, stating the cut aims to “stimulate investment and ease debt burdens” for families and businesses.

Copper exports—accounting for 50% of Chile’s GDP—continue providing a fiscal buffer, yet this wealth isn’t translating into broad-based job creation. “Mining productivity gains haven’t spilled over to labor-intensive sectors,” explains World Bank analyst Carlos Rojas. “Without intervention, unemployment could derail consumer confidence.”

Navigating Toward Neutral Ground

The Central Bank’s strategic “neutral rate” target—between 3.5% and 4.5%—reflects its long-term vision for an economy neither overheated nor sluggish. July’s cut initiates a cautious easing cycle contingent on inflation control. Global risks like Middle East tensions and trade disputes remain watchpoints, though Chile’s financial system has demonstrated resilience.

Future reductions won’t be automatic. Policymakers emphasize a “data-dependent approach,” requiring sustained inflation containment before further cuts. Economists like Antonia López of LatinFocus warn: “Overstimulation could reignite price surges. Precision is paramount.”

Chile’s rate cut reveals the tightrope walk facing emerging economies globally: celebrating inflation wins while confronting the unemployment left in its wake. The 4.75% benchmark offers breathing room for borrowers, but with 8.9% joblessness and global uncertainties, recovery remains fragile. As the Central Bank eyes its neutral-rate horizon, Chileans await tangible relief—not just in prices, but in paychecks and opportunity. Monitor official Central Bank of Chile communications for real-time policy updates.

Must Know

Q: Why did Chile’s Central Bank cut interest rates now?
A: The Bank reduced rates to 4.75% on July 29, 2025, after six months of stability. The cut balances cooling inflation (down to 4.1%) against rising unemployment (8.9%), aiming to stimulate hiring and ease debt costs without reigniting price surges.

Q: How will this rate cut impact Chilean households?
A: Borrowing costs for mortgages, auto loans, and credit cards should decrease gradually. However, those with savings may see lower deposit yields. The cut’s success hinges on whether cheaper credit spurs business investment and job creation.

Q: What’s Chile’s inflation target?
A: The Central Bank targets 3% annual inflation. June’s 4.1% reading shows progress from 2023’s 11% peak, though energy costs remain elevated. Officials project sustained improvement into 2026.

Q: Why is unemployment rising despite economic growth?
A: Chile’s 8.9% jobless rate stems from shrinking retail/public sectors and slow hiring relative to population growth. Strong copper exports haven’t generated sufficient labor demand, leaving job creation stagnant despite GDP gains.

Q: Could further rate cuts follow?
A: Yes, but cautiously. The Bank seeks a “neutral rate” of 3.5–4.5% but will require consistent inflation control and unemployment data before additional reductions. Global volatility could delay easing.