Hungary's economy continues to struggle with weak momentum and only a gradual improvement in inflation, the National Bank of Hungary (MNB) said in its latest Inflation Report.

The central bank now expects Hungary to meet its 3% inflation target only by early 2027, while GDP growth is projected to reach just 0.8% this year – a significant downward revision from the previous 2.4% forecast. Growth is expected to improve slightly to 2.8% in 2026, well below earlier projections.

Strong consumption dynamics will remain "an important factor" of growth over the entire forecast horizon, supported both by rising real wages and government tax reductions, the report said.

Large industrial projects, such as the launch of CATL, BMW and BYD factories in H2 2025, could contribute 0.8pp to next year's GDP growth, the report added.

According to the MNB, the decline in first-quarter GDP and the worsening global environment, including rising geopolitical tensions and trade frictions, are key factors behind the revision. The central bank also noted persistent volatility in global commodity prices and a sharp increase in trade protectionism.

Labour market conditions have started to ease, with employment data reflecting the slowdown, though wage growth remains strong. The report also highlighted subdued corporate investment and falling demand for business services.

Despite recent disinflation, core trends remain concerning. The central bank noted that underlying services inflation would exceed 7% without price controls, and industrial goods prices are also rising faster than desirable.

The report forecasts average annual inflation of 4.7% for 2025, 3.7% for 2026 and 3.0% for 2027.

Monetary policymakers at last week's rate-setting meeting maintained that a strict policy remains necessary to anchor inflation expectations and achieve the 3% target over the medium term. The Monetary Council left the base rate unchanged at 6.5% since September.

The MNB expects the 2025 budget deficit to land between 4.1% and 4.4% of GDP, significantly above the 3% Maastricht target and slightly overshooting the Economy Ministry's latest 4.1% projection. For 2026, the central bank sees the deficit falling only marginally to between 3.7% and 4%, still at risk of missing the official target.

Hungary's gross government debt stood at 73.5% of GDP at the end of 2024 and has already climbed to 75.5% by the end of Q1 2025. The rise was driven largely by high net issuance, which had already reached over half the annual plan.

The MNB warns that weak economic growth and elevated cash-flow-based deficits continue to undermine debt consolidation efforts. The budget deficit is now being financed in part by increased foreign borrowing, further raising the share of foreign currency debt. By end-2025, the FX share is expected to rise to 30.6%, up from 29.8% at the end of 2024.

This leaves the debt level increasingly sensitive to exchange rate fluctuations – a 10 forint change in the EUR/HUF rate could shift the debt ratio by as much as 0.6 percentage points.

On a positive note, the accrual-based deficit is narrowing somewhat, helped by a reduction in public investment and lower interest expenditure due to falling inflation. Government investment is expected to drop to around 3.9% of GDP this year, closer to the EU average.

However, recent budget amendments, including unannounced spending freezes and reduced uptake of RRF funds, signal growing pressure on public finances, the financial website Portfolio.hu observed.

Presenting the report, MNB director Andras Balatoni highlighted significant external changes since the previous Inflation Report, including the tariff war and escalating geopolitical tensions that had fed into commodity prices. He added that the forecast for external demand had been lowered, but said fiscal stimulus in the EU and especially Germany would start to counter the impact of tariff increases.

Mandatory and voluntary price restrictions in force at present affected 16% of the goods and services in the consumer basket and would shave 0.8% off headline inflation for the full year. The restrictions could reduce headline CPI by around 1.5% during the summer months, he added.