Bank of Spain Doubles Inflation Forecasts on Fallout From War

(Bloomberg) -- Spain's central bank doubled its inflation forecasts for this year and next, while trimming its outlook for economic expansion, as Russia's invasion of Ukraine fans already-soaring energy costs.

Consumer prices will surge 7.5% in 2022 and 2% in 2023 -- up from previous projections for advances of 3.7% and 1.2%, the Bank of Spain said Tuesday. Futures markets signal the energy spike may start to ease in July, with inflation gradually slowing to 1.6% in 2024 -- below the European Central Bank's 2% target, it said.

The shock from the war is also likely to delay the economy's full recovery from the pandemic. Growth forecasts were cut by about 1 percentage point, to 4.5% in 2022 and 2.9% in 2023.

The deteriorating outlook in the euro area's fourth-largest economy will concern other members of the currency bloc where rising prices and slower growth risk turning into stagflation. The Bank of Spain also highlighted the high level of uncertainty in its forecasts, which hinge on how long the conflict lasts and the government's response.

“In this highly volatile context, the risks are predominantly oriented downward in the case of economic activity and upward in the case of inflation,” the Bank of Spain said.

While importing little energy from Russia, Spain is among the region's most-exposed countries to the rampup in prices triggered by the conflict. That's because a big portion of household electricity contracts are linked to spot prices, which hit records in March.

Prime Minister Pedro Sanchez has promised 16 billion euros ($17.6 billion) in direct aid and credit to cushion the fallout from the war, including setting a cap on the price of natural gas that's used to generate electricity.

If the government adopts a cap of 30 euros per MWh, headline inflation would immediately ease from 9.8% in March to about 4% by December, according to Bloomberg Economics.