In a scenario that points to a gradual normalisation of inflationary pressures, the entity led by Mário Centeno forecasts that the inflation rate will slow down to 2.6% this year, then converging to values ​​in line with the ECB's price stability objective in the following two years.

“Inflation will fall to 2.6% in 2024 and stabilise at 2% in 2025–26, in a context of slowing wage costs and moderate external pressures”, says the Bank of Portugal in the October Economic Bulletin, noting that the reduction in prices in 2024 “reflects the lower contribution of all the main components with the exception of energy goods”.

In June, the Bank of Portugal predicted that the inflation rate would be 2.5% this year, then falling to 2.1% in 2025 and 2% in 2026.

This downward trajectory in the inflation rate occurs in a context in which “external inflationary pressures are expected to remain moderate”, explains the central bank, which also predicts GDP growth of 2% for this year, followed by growth of 2.3% in 2025 and 2.2% in 2026.

However, the labour market will continue to exert some pressure on prices, with the Bank of Portugal predicting “a favourable evolution of the labour market, with an increase in employment and wages”.

Labour market

The regulator's projections also point to a slowdown in the labour market, with employment growing by 1.1% this year, 0.6% in 2025 and 0.9% in 2026. The unemployment rate is expected to remain stable at 6.4% throughout this period. This robustness and flexibility of the labour market could fuel some wage pressure, with the central bank anticipating that “real wages should increase by 4.6% in 2024 (after 3.5% in 2023)”.

However, the Bank of Portugal stresses that the risks surrounding the inflation projection are balanced. On the one hand, there is the possibility of “more marked lagged effects of monetary policy in the short term”, which could accelerate the fall in inflation. However, on the other hand, “upward risks associated with shocks to international commodity prices and global supply chains in a context of geopolitical tensions, as well as to the dynamism of wages and their transmission to prices” persist.

The scenario outlined by the Bank of Portugal for the evolution of inflation in the coming years suggests that the Portuguese economy is on the right track to leave behind the period of high inflation of recent years, which peaked at a year-on-year rate of 10.14% in October 2022.

However, the regulator stresses that vigilance must be maintained, given the uncertainty that still surrounds the evolution of prices in a complex global context.