Spain’s central bank has lowered its economic growth forecasts for the country in 2024 and 2025 due to the effect of increasing energy costs that also led the bank to hike its inflation forecasts for 2023 and 2024.

Elevated inflation forecasts underscore the difficulties of the eurozone’s attempts to tackle rising consumer prices after the European Central Bank increased the key interest rate to an all-time high of 4% last week.

The Bank of Spain forecasts energy costs to drive Spain’s EU-harmonised consumer inflation to 3.6% this year, a rise from the prior forecast of 3.2%. For next year, the central bank predicts prices to rise 4.3%, surpassing the previous 3.6% forecast.

The pace of price hikes in Spain remains one of the lowest in Europe, Reuters reports.

Furthermore, the Bank of Spain believes energy will be the principal driver of higher prices in the short term, whilst food inflation will likely decelerate in the coming quarters.

Core inflation – excluding volatile food and energy prices – is forecast to slow down from the end of this year, as elevated borrowing costs impact demand, according to the central bank, placing core inflation at 4.1% in 2023 and 2.3% in 2024.

In addition, the bank kept its 2023 economic outlook unchanged at 2.3%, when the economy will benefit from around €15 billion in European pandemic relief funds, according to a statement by Bank of Spain’s chief economist Angel Gavilan.

The amount of EU funding is set to reach €20 billion next year.

Moreover, the central bank forecasted a marginal growth slowdown to 0.3% in Q3 compared to the previous quarter, when the economy grew 0.4%, due to a fall in business turnover and a decline in job creation in certain sectors, the Reuters report adds.

Whereas for 2024, the bank revised its growth forecast to 1.8% from 2.2% as a result of higher energy prices and a weaker external environment. The forecast for 2025 was reduced from 2.1% to 2%.