MNI NBH WATCH: Policy Hold, But Stagflationary Risks Seen

The National Bank of Hungary left key interest rates unchanged at 6.5% in response to persistent price pressures on Tuesday, but lower growth is expected to mean annual inflation will not deviate significantly from levels previously projected. (See MNI EM NBH WATCH: Hold Expected Amid Price Pressures, Uncertainty)

While mandatory and voluntary price caps on a range of goods and services introduced in March had a strong immediate impact on inflation, prices nevertheless increased strongly in May, while household inflation expectations remain high despite decreasing somewhat, the NBH said in a statement.

Inflation will stay above the NBH’s 2-4% tolerance band for the remainder of the year, to average 4.7% (versus the 4.5–5.1% seen in the last Inflation Report). It could then decline to 3.7% in 2026 and 3.0% in 2027, as buoyant consumer demand, volatile commodity market movements and strong wage dynamics mean that the Monetary Council’s June risk assessment is surrounded by mostly upside risks to inflation and downside risks to growth, the NBH said. (See MNI EM INTERVIEW: Hungary Outlook Stagflationary - Ex-NBH's Reiff)

The central bank cut its 2025 GDP growth forecast from 1.9–2.9% to 0.8%, with 2026’s figure revised from 3.7-4.7% to 2.8%, and 2027 from  2.8–3.8 to 3.2%.  

“Strong consumption dynamics will remain an important factor of growth over the entire forecast horizon, supported both by rising real wages and government tax reductions,” the NBH said.

While lower interest expenditures and reduced public investment suggest the fiscal deficit may decrease further in 2025, public debt reduction is being impacted negatively by the high level of cash-flow deficit and subdued economic growth.

Overall, tight monetary conditions and a patient approach to monetary policy continue to be warranted, the Bank said.