Overview
The Hungarian central bank is reassessing the interest rate level required to maintain price stability after inflation fell below the bank’s 3% medium-term target and risk premia improved, according to a senior policymaker. However, officials are moving carefully because of recent swings in long-dated bond yields and in energy prices, and persistent international uncertainty.
Recent inflation dynamics and policy context
Consumer prices in Hungary rose 1.8% in the first four months of 2026, a pace well under the central bank’s March projection of 3.8% average inflation for the full year. Economists polled by Reuters expect May inflation to have come in at 2.3%, which is also below the bank’s target. Those developments have prompted discussion inside the bank about whether the base rate can be set lower while preserving price stability.
Zoltan Kurali, deputy governor responsible for monetary policy and financial stability, told Reuters that the combination of better-than-expected inflation readings and an improvement in risk premia suggests the "potentially the required rate to achieve and maintain price stability might be lower." Kurali said he supported the staff recommendation to keep rates unchanged at the May policy meeting, where one policymaker proposed a cut.
External risks and market volatility
Despite the disinflationary signs, the central bank is cautious because of external developments. Kurali cited the war in Iran and volatility in global markets as reasons for caution. He also pointed to the prospect of major central banks such as the European Central Bank, the Bank of Japan and the Federal Reserve raising interest rates as an additional factor weighing on Hungary’s policy deliberations.
In addition to international uncertainty, local market dynamics are in flux. Kurali highlighted that recent gains in the forint following the April 12 election - which ended former Prime Minister Viktor Orban’s rule - have had a disinflationary impact. Still, he warned that swings in long-end yields and energy prices add to the challenge of timing any rate move.
Policy path and decision criteria
"We need to evaluate the potential trajectory of policy rates, making sure that on a forward basis as well, we maintain positive real rates," Kurali said, adding that "Positive real rates are necessary in Hungary to achieve and maintain price stability." He emphasized that the central bank will closely monitor incoming data and other factors before altering policy.
The June meeting of the Monetary Council is scheduled for June 23. Kurali said the decision for that meeting will depend on several inputs: fresh data releases, the bank’s updated inflation forecast, international uncertainty, market volatility and what he described as a possible risk premia "regime shift" in domestic markets. He cautioned that inflation could still rise again by year-end, underlining the need for vigilance.
When asked whether any reduction in the base rate would be a one-off adjustment or the start of a loosening cycle, Kurali said: "I think it’s difficult to talk about cycles in this environment, mainly because of the international surrounding." He described himself as "always a cautious mover," and declined to specify how low rates might ultimately fall.
Economic and political backdrop
Political developments have fed into market sentiment. Peter Magyar’s centre-right government reintroduced euro adoption onto the policy agenda and reached a deal last month to unlock billions of euros in European Union funds, which has supported investor appetite for Hungarian assets. Kurali noted these developments when discussing the broader policy calculus but did not link them to a definitive policy action.
Inflation target review
The central bank plans to start a regular review of its 3% medium-term inflation target in the summer. This review will run alongside the government’s objective to fulfil euro adoption criteria by 2030. Kurali said the analysis will consider the implications of adopting a lower target closer to euro zone levels, and will examine the strategy and timing for any change, which could be implemented in one or two steps.
"Our expectation is that by the autumn, we will have this analysis fully prepared and discussed," Kurali said. He also noted his expectation that the government is unlikely to formally launch the euro adoption process this year.
Outlook
Economists surveyed by Reuters last month projected that the bank would reduce its base rate by a cumulative 125 basis points by the end of 2027. Kurali stressed that policy choices will remain data-dependent and shaped by international developments and market conditions. For now, the central bank appears to be balancing lower inflation and improved risk premia against external uncertainties and volatile domestic yields and energy prices.
End of article