Fed Rate Hike Narrows Chilean Central Bank's Policy Maneuver Room

The Federal Reserve's decision to raise rates again for the first time in more than three years is redrawing Chile's economic chessboard in real time, and local markets felt it immediately on Monday in a session that combined contradictory signals: the peso strengthened sharply, the IPSA lost ground, and lithium once again took center stage among investor concerns.

The dollar closed down ten pesos, driven mainly by the collapse in Brent crude, which retreated 3.6% to just above US$100 per barrel amid expectations of a diplomatic thaw between Washington and Tehran on the sidelines of the United Nations General Assembly. Crude's fourth consecutive decline eased currency pressure and made the Chilean peso the second-best-performing emerging market currency of the day. Even so, the local currency's appreciation was not enough to support equities: the IPSA closed slightly lower, dragged down largely by SQM, whose stock accumulated massive selling flows following the return from the long Independence Day weekend. Additional pressure came from JPMorgan, which the previous week had cut its price target on the lithium giant's ADRs — a downgrade the market processed with a lag. Copper, by contrast, rose 1% on the London Metal Exchange to US$14,661 per metric ton, approaching all-time highs on signs of near-term scarcity, a tailwind for exporters such as CMPC, Copec and SQM itself in its copper operations.

The overarching question now hovering over the Banco Central de Chile is how far the Fed will force it to rethink its stance. The monetary authority held the Monetary Policy Rate at 4.5% on September 8, but the new US hike — 25 basis points, taking the range to 3.75%-4% — narrows the differential and could pressure the peso if the gap continues to close. Chair Rosanna Costa, who will appear before the Chamber's Finance Committee on Tuesday as part of the capital markets reform process, already warned during ChileDay that the risks tied to the Middle East conflict "have intensified," keeping alive the uncertainty over the trajectory of oil prices and, with them, imported inflation. Santander's chief economist, Andrés Sansone, framed the central bank's bet in this context as a fragile balance between external pressure and weak domestic demand, at a moment when the bank itself has cut its 2026 growth forecast to a range of just 0.25%-0.75%, far below the 2%-3% it projected last December.

Former Finance Minister Nicolás Grau acknowledged on Radio Duna that the economy finds itself "in a very different situation" than expected, attributing part of the deterioration to supply-side factors such as the drop in fishing and mining output in the early months of the year, though without absolving the current administration of responsibility. Unemployment, which stands at 9.5% — its highest level since mid-2021 — is the most visible sign of that deterioration and has concentrated the week's political pressure. Housing Minister Iván Poduje previewed a US$200 million sector reactivation plan aimed at accelerating housing deliveries and public works, announced after a meeting with the Chilean Chamber of Construction. The initiative seeks to mobilize employment quickly in a sector that, by all accounts, can absorb labor faster than others. From the opposition, Renovación Nacional proposed complementing these measures with direct hiring subsidies and a strengthening of Fogape, while SOFOFA presented a five-point agenda that includes replacing the current severance-by-years-of-service system with individual accounts and universalizing childcare — proposals the government is also seeking to fast-track, as confirmed by Segpres Minister José García Ruminot.

Mining, meanwhile, offers a more nuanced reading than the word "recession" suggests. Joaquín Villarino, executive president of the Consejo Minero, rejected that characterization and attributed the production drop to factors intrinsic to the copper cycle, though he acknowledged that the buildup of investment projects awaiting regulatory approval is "a wake-up call" that demands urgency. On that front, the government resubmitted to the Comptroller's Office the third Special Lithium Operating Contract, covering the Ollagüe salt flat, led by Canada's Wealth Minerals with a committed investment of US$749 million, following months of back-and-forth that Mining Minister Daniel Mas described as "embarrassing." Paradoxically, while Chile tries to streamline its institutional framework for lithium, Canada's Capstone Copper opted on Monday for the opposite path in other markets: it sold its Cozamin mine in Mexico to Luca Mining Corp. for US$385 million to concentrate resources on its Chilean and US assets — an unmistakable signal that international capital continues to bet on Chile as a long-term mining destination.

The capital markets reform, whose debate resumes Tuesday in the Finance Committee with Costa and the main financial regulators in attendance, adds another layer of complexity to the agenda. The bill, which creates the National Housing Fund to channel mortgage credit, has already triggered a competitive offensive among banks, which have begun offering financing of up to 90% of property value and extended terms to reduce monthly payments. Committee Chair Agustín Romero aims to have the text out of the committee the week of October 19, which implies a tight schedule running in parallel with the budget debate, whose formal process begins on September 30.

What lies ahead in the coming days will bring several fronts into play simultaneously: the meeting between Trump and the Iranian president in New York will determine whether the relief in oil prices has real diplomatic backing or is merely speculative, with direct consequences for the dollar and Chilean inflation; President Kast's return from the UN will unveil the full details of the employment plan the government has been rolling out in installments; and Tuesday's session in the Finance Committee will set the political tone for the capital markets reform. The underlying question — whether the central bank will follow or resist the Fed's direction — will remain without a clear answer until its next monetary policy meeting.

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