Portugal to keep conservative fiscal policy due to inflation, ECB rates

By Sergio Goncalves

LISBON (Reuters) - Portugal will stick to its conservative fiscal strategy of cutting the budget deficit and debt given strong inflationary pressures and the European Central Bank's new cycle of rate hikes, Prime Minister Antonio Costa said on Monday.

Costa said the ECB's ultra-loose monetary policy had helped Portugal save 2 billion euros ($2.10 billion) a year in interest payments on its high public debt between 2015 and 2021.

"But with the rise in interest rates, this expense will increase," he told an event hosted by CNN Portugal.

Pensions, which are indexed to inflation and growth, "will also have a historic increase next year", Costa said, adding that the situation required a prudent fiscal stance.

Aiming to contain rampant inflation, the ECB said on June 9 it would raise its key interest rates in July https://www.reuters.com/markets/europe/ecb-chart-course-out-stimulus-setting-stage-rate-hikes-2022-06-08 by 25 basis points and again in September, when a bigger increase could be necessary if price pressures have not improved.

Euro zone inflation rose to a record high of 8.1% https://www.reuters.com/markets/europe/euro-zone-inflation-confirmed-record-high-81-may-2022-06-17 in May, more than four times the ECB's target of 2%. In Portugal, it was 8%.

Costa said again that the deficit would narrow to 1.9% of gross domestic product this year from 2.8% in 2021, and that the debt-to-GDP ratio would continue its decline.

The government expects debt-to-GDP, which finished last year at 127.4% after dropping from 2020's record high of 135.2%, to stand at 120.7% at the end of this year.

The Bank of Portugal last week upped its economic growth forecast to 6.4% this year. That is above the 4.9% forecast earlier by the government, which was also the growth rate in 2021.

($1 = 0.9508 euros)

(Reporting by Sergio Goncalves; Editing by Andrei Khalip and Catherine Evans)