Portugal economy faces pressure from rising inflation and interest rates

Portugal is facing significant economic pressures driven by rising inflation, increasing interest rates, and a surging housing market. Inflation accelerated to 3.3% in the second quarter of 2026, impacting household incomes and national growth prospects.

In the financial sector, Euribor rates for six and 12 months have reached new highs, with the six-month rate hitting 2.800%, the most common variable rate for Portuguese mortgages. Simultaneously, sovereign debt yields have climbed, with 10-year yields reaching 3.718%, a peak not seen since April 2017. This rise in borrowing costs is attributed to geopolitical tensions in the Middle East and expectations of further interest rate hikes by the European Central Bank.

Contrasting global trends, Portugal’s real house prices rose by 15.2% year-on-year, the largest increase among 57 economies studied by the Bank for International Settlements. This surge is fueled by a structural gap between supply and demand, alongside significant foreign investment. While construction costs have also risen, with a 6.8% increase in July, the government has attempted to mitigate the crisis by cutting VAT on construction and streamlining planning permissions.