Overview#
Goldman Sachs has revised its outlook for the euro area, now anticipating that the European Central Bank (ECB) will implement two interest rate hikes. This change is largely due to ongoing inflation pressures driven by rising energy costs, despite signs of weaker economic growth.
Energy Price Impact#
The bank's updated forecast follows increased expectations for energy prices, particularly due to disruptions in the Middle East. Goldman Sachs' commodities team predicts that shipping through the Strait of Hormuz will remain significantly reduced, at only 5% of normal levels for about six weeks. As a result, they foresee elevated energy prices persisting longer than previously expected, with Brent crude oil projected to reach $80 per barrel by the fourth quarter of 2026, up from an earlier estimate of $71.
Growth and Inflation Adjustments#
In light of these developments, Goldman has downgraded its growth forecast for the euro area by an additional 0.3 percentage points, now estimating year-end growth at 0.7%. The impact on GDP compared to pre-war levels is also expected to worsen, with a peak decline of 0.7%. On the inflation front, forecasts have been raised, with headline inflation anticipated to peak at 3.2% in the second quarter and core inflation at 2.5% in the third quarter. Economists noted that core inflation may persist longer due to the significant energy shock.
ECB Rate Hike Expectations#
Consequently, Goldman Sachs now expects the ECB to increase interest rates by 25 basis points in both April and June, bringing the deposit rate to a peak of 2.5%. The bank highlighted that recent communications from ECB policymakers indicate a readiness to raise rates, suggesting a low threshold for such hikes. However, they also predict that this tightening cycle will be brief, with rates likely to decrease in 2027 as economic growth slows and inflation begins to subside.
U.K. Outlook#
Goldman Sachs has also adjusted its outlook for the U.K., lowering growth expectations to 0.6% year-over-year while increasing inflation forecasts. Headline inflation is now projected at 3.2%, with core inflation peaking at 2.6%. The bank maintains its expectation for the Bank of England's interest rate to remain unchanged, citing tighter financial conditions and a weakening labor market, though they note that this could change if energy prices continue to rise.