Bank of Portugal raises growth forecast but warns of policy risks

"Economic policies with increased expenditure and reduced revenue have a narrow path", he said. For now at least, the bank expects GDP growth through 2026 to benefit from "increased investment and exports", exceeding the projected expansion for the euro area.

The Bank of Portugal on Friday raised its 2024 economic growth forecast to 2.0% from 1.2% predicted in December, but warned that could by hindered by uncertainty over the policies of the next government and any delays in securing EU funds. In its quarterly economic bulletin, the central bank said it expected the economy to grow by 2.3% next year and by 2.2% in 2026. The economy expanded 2.3% last year.

The bank made its forecasts two days after the president invited centre-right Democratic Alliance leader Luis Montenegro to form a minority government. Montenegro has promised tax cuts for companies and individuals, as well as pay hikes for teachers, police and pensioners.

Bank Governor Mario Centeno argued Portugal should preserve surpluses stemming from growth and "not consume in the present", warning that the evolution of expenditure will play a key role in the updated EU Stability Pact from September. "Economic policies with increased expenditure and reduced revenue have a narrow path", he said.

For now at least, the bank expects GDP growth through 2026 to benefit from "increased investment and exports", exceeding the projected expansion for the euro area. Exports should grow by an annual average of 3.6% in 2024-26, it said, seeing investment up by 3.6% this year and by 4.8% on average in 2025-26 on recovering global demand, gradual easing of financing conditions and the use of European recovery funds.

Portugal's euro area-harmonised inflation should slow sharply to 2.4% this year from 5.3% in 2023, and to further dip to 1.9% by 2026, it said. Private consumption - which represents around two-thirds of GDP - is expected to grow 1.9% in 2024-26, "in a context of gains in real disposable income and increased savings".

Centeno also said that at their next meeting on April 11, European Central Bank policymakers will have to analyse all the data, particularly on wages, before deciding on whether to start easing the key rate or keep it at record high.

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