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The Bank of Spain expects inflation to peak in November before easing back below the European Central Bank 2% target next year.
The central bank raised its forecasts to 2.1% in 2021 and 1.7% in 2022 from a previous 1.9% and 1.2% respectively. The spike in inflation, driven mostly by record high electricity prices, will likely be transitory, although the bank didn’t rule out more entrenched price pressures stemming from demands for steeper wage hikes.
“Without any news shocks the expectation is for inflation to reach its maximum level around November,” the central bank’s chief economist, Oscar Arce, said in a presentation in Madrid. “From there the base effect will work in the opposite direction.”
Price pressures are weighing on policy makers, with several ECB rate setters signaling in recent days that they see euro-area inflation potentially exceeding forecasts as the economy recovers and supply bottlenecks drive up input prices. The OECD warned earlier on Tuesday that global central banks need to set out clear strategies for coping with inflation risks.
The Bank of Spain also adjusted its economic growth outlook for this year as the relaxation of pandemic restrictions fired up private consumption in the euro area’s fourth-biggest economy. A pick up in the tourism industry during the summer coupled with fiscal and monetary stimulus contributed to the upward revision of its baseline scenario for GDP in 2021 to a 6.3% expansion, 0.1 percentage points higher than its previous prediction. The institution also raised its forecasts for 2022 and 2023.
The stronger-than-expected rebound in activity in the second quarter will likely propel the economy back to pre-pandemic growth levels by around mid-2022 after experiencing the euro-area’s deepest contraction last year. Although the pace of activity will remain strong in the third quarter the expansion will lose some steam in coming quarters as consumers’ savings dwindle and supply bottlenecks continue.
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