Bank of Spain warns of higher-than-expected inflation in 2023 and 2024

by Lorraine Williamson
The Bank of Spain

The Bank of Spain has revised upwards its price growth forecast for 2023 to 3.6% and for 2024 to 4.3%. The regulator thinks GDP will grow by 2.3% this year, but lowers the forecast for 2024 by 0.4% to 1.8%. 

The fight against price hikes that have been stifling households and businesses for almost two years is going to take longer than expected. The sharp rise in energy prices over the summer – especially oil, with a barrel of Brent crude 28% more expensive than before the holidays – has led the Bank of Spain to revise upwards its inflation forecasts for 2023 and 2024. In addition, the banking regulator warns that the slowdown in the European economy, high interest rates and the rise in energy prices will affect Spain’s economic growth next year.  

Expected average price rise in 2023 

Macroeconomic forecasts published by the banking regulator on Tuesday indicate that 2023 will end with consumer prices rising by an average of 3.6%. And that is 0.4% higher than expected so far. This forecast responds to the rise in energy prices in recent months. Energy prices will also rise next year. Energy support measures taken by the government since 2021 are expected to expire and the inflation forecast for 2024 has been revised to 4.3%. This is 0.7% higher than in the previous analysis. 

Inflation in 2025 below ECB target 

It will take until 2025 for inflation to fall below the European Central Bank’s (ECB) 2% target. In that year, the Bank of Spain expects consumer prices to rise 1.7%. 

The Bank of Spain maintains its GDP growth forecast of 2.3%, in line with the majority of analysts and the current government itself. But in this forecast, the Bank of Spain did not include the revision of GDP data for 2021 and 2022 carried out by the INE on Monday. 

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Forecasts for 2024 have been revised downwards. This is due to signs of a slowdown coming from various parts of the world and the rebound in energy prices. The regulator thinks GDP will grow by 1.8% next year -four tenths of a percentage point less than forecast before the summer. 

Growth slowdown 

The Bank of Spain predicts that the economy will slow down in the second half of this year. The regulator expects GDP growth of 0.3% in the third quarter. This is lower than in the first (0.5%) and second (0.4%) quarters. Weak activity is expected in the fourth quarter due to the fall in exports and the impact of interest rate hikes, which will continue to take their toll on households and businesses. 

The economy could rebound as early as the first quarter of 2024 due to a recovery in exports and a fall in inflation. This may allow workers to regain some of their lost purchasing power. The deployment of European recovery funds also provides support. 

Interest rates 

The economy faces several factors that weaken growth and are subject to uncertainty. First, there are interest rates, which by historical standards will remain very high even in 2024. Then there is the withdrawal of energy support measures, which will increase energy prices, affecting households and businesses. And then there is the fact that tourism, which was a major driver of growth this year, will slow down after having already fully recovered this year. 

The Bank of Spain acknowledges that it is difficult to assess the impact of strong interest rate hikes on the economy. If interest rate hikes are stronger than expected, the economy could weaken and inflation could fall faster. The Bank of Spain admits that in this context, it is “particularly difficult to determine the right dose of monetary tightening”. 

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