Cool head: Banco de Portugal worsens economic forecasts

Growth drops to 1.8%, inflation accelerates to 2.8%. War in Iran and recent storms have altered accounts.

The Bank of Portugal (BdP) revised downwards the growth and economy in 2026 to 1,8%, due to the impact of the war in the Middle East, according to the economic bulletin released this Wednesday.

This prediction compara with an estimated growth of 2,3% included in the December economic bulletin, a value that also corresponds to the Government’s projection, in the State Budget for 2026.

A downward review of the BdP estimate is 0.5 percentage pointswhich reflects the “deterioration of the international context, following the conflict in the Middle Eastwhich resulted in an increase in the price of energy goods and the expectation of worsening financing conditions”, according to the central bank.

Inflation

The central bank also estimates that the inflation will accelerate to 2,8% em 2026.

The indicator that measures price evolution was revised upwards by 0.7 percentage points (pp) this year and 0.3 pp to 2.3% in 2027, due to increased pressures from external sources.

“The conflict in the Middle East explains, to a large extent, the upward revisions in inflation in 2026 and 2027”, says the central bank, and the “dissipation of the effect of the energy shock on prices and the maintenance of anchored long-term inflation expectations should contribute to the reduction of inflation to 2% in 2028”.

“Cool head”

The governor of the Bank of Portugal, Álvaro Santos Pereira, assumed that the conflict in the Middle East and the storms bring “more pressure to increase support for families and companies”, affecting the budgetary margin.

If the 2025 fiscal surplus is greater than expected, as the Finance Minister signaled, it will be “good news”, but he admitted that the fiscal margin “is not increasing, it is decreasing”.

“There is greater pressure on expenditure, particularly on net expenditure, and now with the conflict there is more pressure to increase support for families and companies and also with the storms”, signaled Santos Pereira, warning that there will be greater budgetary pressure.

When looking at the budget balance numbers, you need to take into account that it is “fundamental to reduce debt”particularly to respond to phenomena such as the current ones.

Regarding a possible increase in interest rates of the European Central Bank, the governor responds: “We have to maintain cool head. We have to learn the lessons of the past, see what happened in other circumstances and then react. Now I’m not going to speculate on interest rates, it doesn’t make sense.”