Hungary’s Economic Stagnation and Weak Forint to Halt Rate Cuts

Hungary's economy faces a challenging third quarter with zero growth expected and the forint at an 18-month low against the euro. This gloomy outlook could force the central bank to maintain current interest rates for an extended period.

Deputy Governor Barnabás Virág of Hungary's central bank signaled a potential pause in interest-rate cuts at a conference in Budapest this week. "The MNB may not only pause interest rate cuts in October. If the external environment and inflation outlook justify, the base rate may stay unchanged for a sustained period, raising our interest premium," Virág stated.

This hawkish stance comes as the National Bank of Hungary grapples with a declining currency that recently hit an 18-month low against the euro. Virág had previously indicated that a rate cut at the upcoming Oct. 22 meeting was unlikely.

“The MNB may not only pause interest rate cuts in October. If the external environment and inflation outlook justify, the base rate may stay unchanged for a sustained period, raising our interest premium,” the central banker said.

At the same conference, Economy Minister Márton Nagy delivered sobering news, predicting that Hungary's annual economic growth will be "close to zero" in the third quarter. Nagy warned that the Oct. 30 data release may fall short of market expectations, raising concerns about a potential recession following the previous quarter's contraction. He attributed the economic struggles to Germany's stagnation, Hungary's primary export market.

Prime Minister Viktor Orban's government is racing to revitalize the economy before the 2026 elections, with recent polls showing a tight race between the ruling party and the main opposition. The cabinet has approved a 21-step economic program, focusing on stimulating the housing sector, including a plan to allow tax-free withdrawals from private pension funds for property purchases and renovations.

Despite cutting the key interest rate to 6.5% last month, the central bank now faces limited room for further easing. Virág cited emerging-market headwinds from geopolitical tensions and shifting U.S. rate expectations as factors posing inflationary risks.

While inflation recently slowed to the central bank's 3% target, it's projected to rise to 4.2% by December. Virág expressed particular concern about service-sector inflation, which remains significantly higher than the headline rate.

"Meeting the inflation goal in a sustained way and preserving financial-market stability are key," Virág emphasized. "For this we need cautious, strict, stability-oriented monetary policy."