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However, the unfolding conflict involving Iran presents serious risks to the outlook.
The improving inflation picture would in itself create room for further interest rate cuts, but the emerging geopolitical crisis in the Middle East could significantly threaten this scenario. The situation in the region remains highly unpredictable and could shift rapidly in either a positive or negative direction, experts at the MBH Analysis Center underlined.
Looking at recent developments in the real economy, the services sector remained the primary engine of growth last year. The sector benefited from strengthening consumption and improving household confidence, while industry continued to weigh on economic performance due to weak external demand.
For 2025 as a whole, economic growth is estimated at just 0.4%.
“This year we may see a meaningful turnaround in growth: in our baseline scenario we expect GDP to expand by 2.3% in 2026, followed by growth above 3% in 2027. If the Middle Eastern conflict leads to persistently higher energy prices and keeps investors in a risk-averse stance, growth could be slower than this,” said Zoltán Árokszállási, director of the MBH Analysis Center.
Hungary’s labor market showed mixed developments toward the end of 2025. The number of employed people declined rapidly in the final months of the year, although the unemployment rate did not rise significantly. Instead, the share of inactive people increased.
With a rate of 4.4% in December, unemployment essentially stagnated, although it rose somewhat in January.
“We do not expect a meaningful decline in the unemployment rate this year; for 2026 we project an average level of 4.4%. The labor market typically reacts to economic developments with a delay, so the acceleration in growth could bring improvement to this market from the second half of the year,” added Márta Balog-Béki, senior analyst at the MBH Analysis Center.
The situation in the Middle East could also affect the labor market, although likely with some delay. Rising oil and gas prices could increase corporate energy and transportation costs, placing additional pressure on companies.
In such circumstances, companies may seek to reduce costs by cutting jobs or increasing the use of part-time employment.
However, analysts believe there is still a chance that some form of agreement could be reached before these factors begin to exert a significant impact on Hungary’s labor market, as uninterrupted oil and gas supply remains crucial for global trade.
Inflation trends improved significantly toward the end of last year, and January data already indicated that inflation could remain below the central bank’s 3% target for several months.
The extension of the retail margin cap on certain food products until the end of May is expected to further curb food price increases. The eventual phase-out of the measure is also expected to have only a moderate impact on inflation, partly due to the price monitoring system and partly because of improving procurement conditions.
“Price pressures are more moderate than we expected, which is why we have lowered our inflation forecast for 2026 from 3.5% to 2.9%. Despite wage increases and transfers, corporate pricing behavior has remained restrained, which is an encouraging sign,” Balog-Béki said.
However, the Middle Eastern conflict could worsen the inflation outlook through higher fuel prices and a weakening forint.
Retail fuel prices are not determined directly by crude oil prices, meaning the full impact of rising oil prices may not immediately appear at filling stations. Even so, analysts say the effect could still lead to price increases of HUF 20-30 per liter, with a weaker forint potentially amplifying the increase.
If tensions de-escalate, fuel prices could decline again after a temporary rise, and the short-term weakening of the forint would likely not have a lasting inflationary effect.
More favorable-than-expected inflation data in January allowed for a February interest rate cut. After a year and a half of stagnation, the benchmark rate was reduced to 6.25%.
Markets initially priced in the continuation of rate cuts in March, but the Iranian conflict could prompt the Hungarian National Bank (MNB) to take a wait-and-see approach.
“Favorable inflation trends and the still relatively high domestic interest rate level in regional comparison would in themselves create room for further monetary easing. However, the situation in the Middle East could disrupt this if high oil and gas prices persist and pressure on the forint does not ease,” Árokszállási said.
If the Iranian conflict is resolved quickly and hostilities end, the base rate could fall below 6% this year. In such a case, the rate-cutting cycle could continue in 2027 as well, although the pace would depend largely on inflation developments next year.
According to MBH Bank’s forecast made before the outbreak of the conflict, the MNB’s benchmark rate could stand at around 5% by the end of 2027.
In recent months, the forint strengthened to below HUF 380 against the euro, supported by the weakening of the dollar internationally, relatively high domestic real interest rates and favorable investor sentiment.
The Hungarian currency also proved resilient in February, even amid renewed dollar strength and the MNB’s rate cut.
However, the Middle Eastern crisis that erupted in recent days significantly weakened the forint.
According to analysts, the near-term movement of the Hungarian currency will largely depend on developments surrounding the Iranian conflict. If tensions ease quickly, the euro could again fall to around HUF 380 or even lower. If the conflict escalates further, the forint could weaken beyond the recently reached level of HUF 385.
Based on the latest data, Hungary’s 5% deficit target for 2025 may have been achieved and could even prove slightly more favorable.
Although recently announced consumption-boosting and welfare measures place additional burdens on the expenditure side of the budget, part of the income distributed to households is expected to appear in consumption. This could increase VAT revenues while also supporting economic growth.
According to the MBH Analysis Center, the accrual-based budget deficit could reach 5.3% of GDP in 2026 and 4.8% in 2027.
Over the longer term, analysts expect a meaningful decline in the deficit, partly due to the positive effects of economic growth and partly because fiscal policy is likely to adopt stricter cost controls.
If the Iranian conflict leads to a sustained environment of higher energy prices, however, rising utility protection expenditures and weaker economic growth could result in a somewhat higher deficit relative to GDP.
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