Goldman Sachs has updated its macroeconomic outlook for the euro area, citing a sharper and more persistent energy-price shock following disruptions linked to the Middle East. The bank's economists now see the European Central Bank (ECB) delivering two 25 basis-point interest-rate increases at its April and June meetings, taking the deposit rate to a 2.5% peak.
The revision follows higher energy-price assumptions. Goldman’s commodities team now expects shipping through the Strait of Hormuz "to remain at only 5% of normal levels for 6 weeks," a development the bank says will keep energy prices elevated for longer. As a result, Goldman raised its Brent crude oil price assumption for the fourth quarter of 2026 to $80 per barrel, up from a previous projection of $71.
Against this energy-driven backdrop, Goldman trimmed its euro-area growth forecast. The bank reduced year-end growth by 0.3 percentage points, bringing the forecast to 0.7%. It also said the peak hit to GDP relative to pre-war levels has increased to 0.7%.
Those growth adjustments came together with higher inflation projections. Goldman now expects headline inflation to peak at 3.2% in the second quarter, while core inflation is forecast to reach 2.5% in the third quarter. Economists led by Sven Jari Stehn noted that they see "slightly more persistence in core inflation given the bigger magnitude of the energy shock." They added that "risks to our new forecast are skewed towards lower growth and higher inflation."
Reflecting both the higher inflation outlook and recent shifts in policy communication, Goldman wrote that policy signals and updated projections point to "a low hurdle for rate hikes." The bank therefore anticipates the ECB will raise rates twice by 25 basis points each in April and June. However, Goldman expects the tightening cycle to be short-lived: as growth weakens and inflation eases, rates are forecast to start falling in 2027, with the ECB ultimately moving policy rates back toward a 2% neutral level.
Goldman’s economists emphasised that the fiscal response to the energy shock will be a key determinant of how long elevated policy rates are sustained. They wrote that fiscal measures will play an important role in shaping the ECB’s response and the duration of higher interest rates.
The bank also adjusted its outlook for the United Kingdom. Goldman lowered its U.K. growth projection to 0.6% year-over-year while raising inflation expectations, now forecasting headline inflation to reach 3.2% and core inflation to peak at 2.6%. For the Bank of England, Goldman maintains a baseline view of an unchanged Bank Rate, citing tighter financial conditions and a weakening labour market, but described that stance as "a close call" given hawkish communications from policymakers. The bank noted risks are tilted toward potential rate hikes if energy prices continue to increase.
Context and implications
Goldman’s updates tie a more restrictive near-term monetary stance to an energy-price shock that is both larger and more persistent than previously assumed. The combination of higher projected inflation and lower growth has led the bank to expect a brief ECB tightening cycle, followed by easing as economic slack reappears and inflation pressures fade.