Hungary's central bank Deputy Governor Zoltan Kurali indicated that an interest-rate cut is possible before year-end, provided external market conditions are favorable and the government presents a credible deficit-reduction plan linked to euro adoption. The National Bank of Hungary recently held its base rate at 5.5% and lowered its inflation target to 2.5% from 3%, aiming to align with the country's strategy to join the single currency. Kurali highlighted that fiscal clarity and the official start of the euro-adoption process would shift the economic outlook to a more favorable risk environment.
Prime Minister Peter Magyar's government, which assumed office in April, has committed to meeting the terms for euro entry by 2030. This timeline suggests that Hungary could enter the Exchange Rate Mechanism II (ERM-II) by early 2029 at the latest, potentially adopting the euro as soon as January 1, 2032, assuming the Maastricht criteria are met. Policy makers will consider energy market developments, the 2027 budget, and a medium-term fiscal plan, which the government is expected to unveil next month, when deciding on future easing measures.
Inflation in Hungary rose slightly to 1.3% in August from 1.2% in July. Despite this, economists generally anticipate another 25-basis-point rate cut by the end of 2026, as forecasted in a September Reuters poll. Kurali, however, stressed the need for caution due to volatility in core market yields and global energy prices. Magyar's focus on euro adoption has already attracted significant foreign investment, with over $13 billion poured into the local bond market year-to-date, according to Deutsche Bank. The central bank's immediate priority is anchoring the economy to its revised 2.5% inflation target to guide wage and price behavior, and any further reduction in the inflation target would only be considered after Hungary joins ERM-II.
Kurali noted that external risks remain high, with volatile energy prices and climate change impacts already reducing economic growth by 0.4 percentage points and increasing inflationary pressures. Domestically, strong wage growth and services-price growth, particularly in the 5% to 6% range due to one-off adjustments in banking and telecoms, were identified as key risks. He emphasized that companies need to boost productivity to prevent a wage-price spiral, believing that the lower inflation target should help curb double-digit wage increases. While the MNB is prepared to support the euro adoption process, the earliest realistic date for euro introduction is 2032, with some analysts like Equilor suggesting 2033 due to ongoing fiscal challenges, particularly concerning the high public debt and its interest burden.
