An Important Step towards the Euro Zone

At its September meeting, the Monetary Council of the National Bank of Hungary (MNB) left the base rate unchanged at 5.50%, marking the first time it has kept the benchmark rate steady following the interest rate cuts over the summer.

The central bank announced that, effective January 1, 2028, it will lower its inflation target from 3% to 2.5%, a move that can be seen as the first significant step toward aligning with the euro zone. In addition, starting in 2027, in line with ECB practice, the MNB will hold eight interest rate policy meetings per year instead of twelve. The central bank's move reinforced international investors' confidence in the introduction of the euro in Hungary, Reuters reported this Thursday.

The Hungarian currency, the forint strengthened in response to the announcements; however, analysts say that due to the lower inflation target and the still uncertain external environment, the potential for further interest rate cuts is limited in the short term.

Péter Virovácz, a senior economist at ING Bank, believes that domestic policymakers are adhering to their previous commitments regarding the euro adoption plan, particularly with regard to the medium-term fiscal path, and that EU funds will arrive in the fourth quarter as expected. He says inflation is likely to remain low and below the central bank’s inflation target (3%) for the remainder of the year, although one can anticipate some acceleration in the coming months, mainly in the areas of fuel and services.
If the risk premium on Hungarian assets declines in tandem with a general improvement in risk sentiment, it is possible to see two, or possibly even three, interest rate cuts over the next six months. According to ING Bank forecast, the base rate will reach 5.25% by the end of 2026, followed by a further decline to 4.25–4.50% by the end of 2027.

János Nagy, a macroeconomic analyst at Erste Bank, noted that this was the first time interest rates had been held steady at 5.50% since the rate cuts during the summer months (totaling 75 basis points) and that the forint strengthened in response to the announcements, as further steps toward eurozone accession took shape.
He added that, concurrently with the publication of the Monetary Council’s statement, Central Bank Governor Mihály Varga held a press conference to explain the rationale behind the decision and present the forecasts from the new Inflation Report. Based on the September forecast, Hungarian GDP will grow by 1.8% in 2026, 2.9% in 2027, and 2.8% in 2028. The annual average rate of inflation will be 1.8% this year and 3.1% in 2027. By the end of the monetary policy horizon, inflation will moderate to the central bank’s 2.5% target.

Dávid Németh, a senior analyst at K&H Bank, believes that the decision to hold interest rates steady is primarily due to risks stemming from geopolitical tensions; inflation trends would have allowed for a further cut. The base rate is likely to remain at 5.5% this year, with another cut expected in the medium term. Further changes may depend largely on the 2027 budget plan; the projected budget and public debt trajectories could significantly influence Hungary’s risk assessment, thereby determining the central bank’s room for maneuver. The expert says the benchmark interest rate could fall to 4.5% by the end of next year.

According to Péter Kiss, investment director at Amundi Asset Management Plc., it was in line with expectations the National Bank of Hungary’s lowered its inflation target to 2.5% – and also in line with preliminary indications. The target’s tolerance band remains at plus or minus 1%. In addition, the central bank indicated that it is shifting to data-driven decision-making, meaning it will not project an interest rate path for the near future, as it has often done in the past. This is the first major decision by Hungarian economic policymakers specifically aimed at facilitating the adoption of the euro, and as such, it led to an immediate strengthening of the forint. He asserts that in the near future – no later than in the 2027 budget proposal – a similar commitment must be demonstrated on the part of fiscal policy as well, so that the adoption of the euro remains a credible objective.