Hungary’s Central Bank Keeps Interest Rates Steady
Hungary’s central bank has decided to keep its base rate unchanged at 6.5%, which is the joint-highest level in the European Union. This decision was made amid fiscal loosening, high inflation expectations, and uncertainty over the inflation outlook after next year’s parliamentary election.
Reasons Behind the Decision
The decision to keep borrowing costs unchanged for the 14th successive month was in line with the expectations of 13 economists in a Reuters poll. The forint traded at 384.45 to the euro, stronger than 385 per euro just before the rate announcement. In September, the bank raised its 2026 inflation forecast to 3.8%, driven in part by government moves fuelling consumption in the run-up to the vote.
Impact of Government Policies
Last week, the government raised its budget deficit targets to 5% for this year and next to make room for more pre-election spending, hitting the forint and sending Hungary’s 10-year bond yields to two-month highs above 7%. The European Commission said Hungary’s budget deficit could widen to 5.1% next year, or even higher, if the government launches a pension top-up.
Effects on Inflation
The central bank stated that higher budgetary expenditures have a stimulating effect on domestic demand and make reducing the public debt-to-GDP ratio harder. Maintaining tight monetary conditions is warranted. The government has also extended price controls on basic foods and other goods until the end of February, while an excise tax hike on fuel that had been due to come into force in January will be delayed by six months.
Economic Projections
Economists expect headline and core inflation to rise from Q2 2026, as profit caps expire and unfavourable base effects kick in, while consumer demand remains strong, fuelled by fiscal easing. The central bank has said the government’s measures have lopped 1.5 percentage points off headline inflation, which ran at 4.3% in October, outside the bank’s tolerance band. Economists see inflation slowing to 3.75% by the end of this year before accelerating again to 4.35% by the end of 2026.
Rate Easing Predictions
Some economists have pared their bets on rate easing due to pre-election stimulus. The risks to the forecast for the base rate to be cut by 100 basis points next year now seem skewed to less easing being delivered. Economists had been forecasting the base rate to be cut in early 2026 as inflation falls towards target, but that now looks less likely given pre-election stimulus.
Conclusion
In conclusion, Hungary’s central bank has decided to keep its interest rates steady at 6.5% due to various economic factors, including fiscal loosening, high inflation expectations, and uncertainty over the inflation outlook. The government’s policies, such as extending price controls and delaying tax hikes, are expected to have an impact on inflation. Economists have adjusted their predictions for rate easing, and it remains to be seen how the economy will fare in the coming year.
