Goldman Sachs expects the European Central Bank to raise interest rates twice, as energy shocks drive up inflation prospects.

Investing.com - Goldman Sachs has updated its Eurozone outlook, now expecting the European Central Bank (ECB) to raise interest rates twice due to persistent energy-driven inflation pressures offsetting weak growth.

Get deeper insights into EU policy outlooks on InvestingPro.

This adjustment was made after energy price assumptions were raised due to turmoil in the Middle East. The bank stated that its commodities team now expects shipping through the Strait of Hormuz to remain at normal levels only 5% of the time over the next six weeks, leading to the expectation that energy prices will stay high for a longer period. Brent crude oil is projected to reach $80 per barrel in Q4 2026, up from $71 previously.

Against this backdrop, Goldman Sachs further downgraded its Eurozone growth forecast by 0.3 percentage points to 0.7% for the year-end, with the GDP peak-to-trough impact rising to 0.7% compared to pre-war levels.

Meanwhile, inflation forecasts have been raised, with overall inflation now expected to peak at 3.2% in Q2, and core inflation reaching 2.5% in Q3. “Given the larger energy shock, the persistence of core inflation has slightly increased,” said economists led by Sven Jari Stehn.

“Our new forecast leans toward lower growth and higher inflation,” they added.

Therefore, Goldman Sachs now expects the ECB to raise rates by 25 basis points at the April and June meetings, bringing the deposit rate to a peak of 2.5%. Economists say that policy signals and updated forecasts indicate a “lower hurdle for rate hikes,” with recent communication from policymakers turning more hawkish.

However, the tightening cycle is expected to be short-lived. Goldman Sachs predicts that as growth weakens and inflation eases, interest rates will start to decline in 2027, with the European Central Bank returning its policy rate to a neutral level of 2%.

“Fiscal responses to the energy shock remain a key factor in how the ECB will respond and how long higher policy rates will be maintained,” economists wrote.

Goldman Sachs also revised its UK outlook, lowering growth to 0.6% year-on-year, while raising inflation forecasts to 3.2%, with core inflation peaking at 2.6%.

The bank maintains its baseline forecast of unchanged policy rates, citing tightening financial conditions and a soft labor market. However, following hawkish communication from the Bank of England, they describe this as “a difficult decision,” with risks tilted toward potential rate hikes if energy prices continue to rise.

This article was translated with the assistance of artificial intelligence. For more information, please see our Terms of Use.