"They have shown in the past few years that they belong to the elite of world football," said German boss Loew ahead of the encounter in Kazan, Russia.
"Chile have fantastic individual players and are flexible tactically like few other teams, they can switch things around several times during a match."
Both teams have three points with Chile ahead on goal difference after their 2-0 win over Cameroon and Germany's 3-2 victory against Australia.
Loew, having rested all of his World Cup-winning stars, will match his young guns against an experienced Chile team which won both the 2015 and 2016 Copa America titles.
Both sides are amongst the favourites to win the 2017 Confed Cup in the St Petersburg final on July 2.
"They are the rival that will give us a good idea of what we can accomplish here," said Chile's Edson Puch, who started in place of Arsenal's Alexis Sanchez against Cameroon.
Regardless of their inexperience – the entire Germany squad had just 149 caps between them – Marcelo Diaz said facing the world champions requires a certain mind set.
"In order to play them, we need to be psychologically prepared, at your best, and we are," said the midfielder.
"Our mentality is one of our biggest achievements of this team."
Loew changed his goalkeeper in each of his last three games and Germany's shot-stopper Bernd Leno could lose his place having leaked two goals against Australia.
Chile's Arturo Vidal opened the scoring against Cameroon and he is set to face three Bayern Munich team-mates in Joshua Kimmich, Sebastian Rudy and Niklas Suele.
Likewise, Arsenal team-mates Shkodran Mustafi and Sanchez could line up against each other.
Germany have won all four meetings between the countries in the last 40 years.
The most recent was in 2014 when Mario Goetze's goal sealed a 1-0 friendly win in Stuttgart.
In Thursday's other Group B game, Australia play Cameroon in St Petersburg with both teams knowing they can ill afford another Confed Cup defeat.
"Australia play with a lot of fighting spirit and I expect a difficult game against a team with a different style to Chile," said Cameroon's Belgian coach Hugo Broos.
"We will have to be at our top level, because if we lose we are done at this tournament."
Broos is expected to stick with the same line-up which leaked late goals by Vidal and Eduardo Vargas against Chile.
After a quiet opening match, Christian Bassogog – the player of the tournament at the 2017 Africa Cup of Nations – will be keen to shine on the right wing.
Having conceded early goals against both Brazil, in last week's 4-0 friendly defeat, and Germany, Australia coach Ange Postecoglou will want to tighten his defence.
Likewise, talented midfielder Aaron Mooy will be expected to help maintain possession in the middle, an area where Australia struggled against Germany.