Hungary Outlook | Inflationary challenges to impede support of growth

The economy emerged from a technical recession at the end of last year. A continued slow recovery is expected, although export-related uncertainties burden the overall outlook. Household consumption will be the main growth driver, similar to 2024. We project annual GDP growth at 2 percent in 2025. At the turn of the years 2024-25, inflation started to show another revival. Without a doubt, the rapid depreciation of the forint seen in 4Q24 played a crucial role, as the pass-through effect of the weaker currency on prices considerably strengthened during the 2021-2022 inflation shock. Repricing in the field of market services was also surprisingly strong in January, partly due to improving consumption. Inflation is set to remain well above the 2-4 percent tolerance range of the MNB throughout the year and is expected to slowly moderate in 2026.

The policy rate has been standing at 6.50 percent since the end of 3Q 2024. The MNB responded to the deterioration in global risk perception, the weakening of the forint, and increased inflation risks by pausing rate cuts. The timing of restarting the monetary easing process remains uncertain. We think that later in the year, cautious rate reductions cannot be excluded, but only if risk assessment factors and the inflationary outlook improve. At the beginning of March, former Finance Minister Mihály Varga took over the leadership of the MNB, as the mandate of György Matolcsy had expired. A change in leadership at the MNB is unlikely to bring a significant change in the current stance of monetary policy, given the increased upside risks to inflation. Since the beginning of the year, the forint has appreciated against the euro, after significant weakening seen in 4Q24. The overall sensitivity to both positive and negative external factors has remained a key feature, leading to huge volatility in the exchange rate. In the current uncertain environment, this sensitivity makes the EURHUF exchange rate rather difficult to predict. The remaining positive interest rate differential and continued surplus on the external balance may be the most important fundamental support for the forint.