The Bank of Spain warns that if the war drags on, inflation could skyrocket

MadridThe conflict in the Middle East has not gone unnoticed in the update of the Bank of Spain's macroeconomic forecasts, despite the short timeframe between the outbreak of the war and the preparation of a new report. The supervisory body acknowledges that the attack by the United States and Israel on Iran and the ramifications in the region will have an impact on the growth of the Spanish economy, but above all on the evolution of prices. In fact, if the conflict becomes entrenched, the average inflation rate for 2026 could soar to 5.9% due to disruptions in the global energy market. However, the body chaired by former socialist minister José Luis Escrivá estimates that the package of fiscal measures from the Spanish government, which was validated by Congress this Thursday, will help to "cushion" the economic shock of a war that, for now, does not seem to have an end.validated by Congress will help to "cushion" the economic shock of a war that, for now, does not seem to have an end.In general terms, the Bank of Spain (BdE) forecasts that gross domestic product (GDP, the indicator used to measure the size of an economy) will grow by 2.3% in 2026, as indicated in the report published this Friday. This may seem contradictory because it represents a slight improvement compared to the December forecasts, i.e., the pre-war forecasts, when the entity forecasted that the Spanish economy would grow by 2.2% in 2026.

However, before the conflict, the BdE estimated a growth of 2.4% for this year, which is much more favorable. A good economic performance explained by the momentum of private consumption in the last months of 2025 (in the fourth quarter, the economy rebounded by 0.8%) and the beginning of 2026. The outbreak of the war would have had an impact of 0.4 tenths on this forecast, meaning that economic growth would have stood at 2% if the announced measures had not been implemented, according to the Bank of Spain. Nevertheless, as with prices, if the conflict drags on for months, the Spanish economy could grow by only 1.9% this year, according to the most adverse scenario drawn by the institution.

The same is true for inflation, although the trend is more unfavorable in this case. In this regard, the economic dynamism of late 2025 was already driving prices up even before the war, and the Bank of Spain predicted that average inflation would be around 2.7% this 2026 (in December it placed it at 2.1%). The war further fuels this trend due to the pass-through of gas and oil prices onto electricity; also due to pressure on food prices, which will become more expensive due to the conflict's effects on fertilizers, as well as so-called second-round effects: for example, an increase in costs for companies. With the decree of measures, the Bank of Spain leaves the forecast for the average inflation rate in 2026 at 3%, almost one percentage point higher compared to three months ago.

Regarding the package of fiscal measures, which includes direct aid and subsidies, the Bank of Spain has highlighted that it is "well-defined," in the words of the organism's Director General of Economy, José David López. However, López also acknowledged that they would have preferred it to be even more "focused." "Selective measures would allow a similar degree of protection to be achieved, as well as reducing distortions on relative price signals," suggests the organism. "It suffers from a redistributive deficit," indicated the director of the economic area at an informative meeting.

Different scenarios

In the same way as the European Central Bank (ECB), the Bank of Spain works with different scenarios depending on the evolution of the conflict in the Middle East. In a central scenario, the risks to the forecasts published this Thursday are downward regarding economic activity, meaning that growth could slow down. Whereas in the case of prices, the risks linked to the war are pushing the forecast upwards.

"A higher intensity of the war conflict and its prolongation for several months —a possibility that, in light of the most recent events, seems to be gaining more weight— would keep energy commodity prices high and increase the probability of second-round effects on wages and prices along the production chain materializing. All of this could translate into less dynamism in economic activity and higher inflation rates than currently projected in the central scenario," concludes the Bank of Spain.