The Monetary Council of the MNB kept interest rates unchanged at 6.5% at its rate-setting meeting on March 26, the first to be headed by new governor Mihály Varga, who projected a permanently high interest rate level as the inflation outlook deteriorated. According to the MNB’s forecast, inflation will be higher this year than previously expected, while economic growth is predicted to be slower. Analysts believe that the interest rate may decrease towards the end of the year, but with high inflation remaining in circulation, there is no guarantee of this.
The decision by the Monetary Council marks the sixth consecutive time that the central bank has kept the key rate unchanged; the last time the council made a cut was in September 2024. The council, led by the new governor, found it had to make its interest rate decision in a difficult economic situation. Perhaps the most critical development was that inflation increased significantly at the beginning of the year. It is now clear that 2025’s likely inflation path is much higher than the central bank had expected at the end of December.
Several factors, such as the rise in raw material prices, the significant weakening of the forint at the end of last year, and wage dynamics, have triggered inflation’s acceleration. These have combined to move Hungary back to the top of an unwanted podium among the leading EU member states in the generally strengthening European inflation trend.
Following the rate decision, the central bank released its latest quarterly Inflation Report on March 27. The fresh version includes significant changes in key indicators. Most importantly, the report states that this year’s annual inflation rate could be 4.5% in the best case but 5.1% in the worst.
As for economic growth, the MNB now thinks that GDP could grow by 2.9% in the most optimistic calculation but only 1.9% in the worst case. Average earnings could increase between 9.5% and 10.3%, which, adjusted for inflation, means that real income will grow between 2.9% and 3.7%. According to the forecast, employment will stagnate in the best-case scenario or a 0.4% decrease in the worst. The general government deficit will be somewhere between 3.5% and 4.3% of GDP.
Core inflation, excluding indirect tax effects and which captures underlying inflation processes, is projected to range between 4.8% and 5.3% in 2025, 3.2% and 3.9% in 2026, and 2.6% and 3.2% in 2027, the report says.
“Regarding this year’s core inflation excluding indirect tax effects, we raised the midpoint of the forecast range by 1.6 percentage points relative to our December forecast. Core inflation will fall to around 5% by April and may remain at a similar level for most of the year. Underlying trends may decelerate substantially again from the beginning of 2026, supporting the achievement of the inflation target,” the MNB notes.
The government’s introduction of a compulsory cap on the margin of food retail traders might help, but inflation is still expected to remain high for a long time. Its official target is that inflation operates within a 2-4% band. The MNB estimates that limiting food margins will reduce inflation by 0.8 percentage points in April and May.
A very short time has passed since the cap was introduced, so conclusions can only be drawn with caution; analysis has shown that in the first two days of the new rule, the prices of the affected products decreased by an average of 14.6% compared to the previous week. It is important to note that this is an average decrease: yogurt and margarine, for example, became 30% cheaper in these two days; however, other products became slightly more expensive within the same period.
The Inflation Report shows that the MNB now sees 2025 as worse in almost every respect than the government had assumed when planning this year’s budget in late 2024. In a twist of timing, the budget was written and submitted by the now-disbanded Finance Ministry, headed by Mihály Varga as minister. In preparing the 2025 budget, the government calculated with an inflation rate of 3.2%, expected that GDP could grow by 3.4% and that the deficit would be 3.7%.
The main numbers of the latest Inflation Report were revised downwards compared to the December forecast, prepared when Varga’s predecessor, György Matolcsy, was still governor. Then, the MNB expected inflation of 3.3-4.1% and GDP growth of 2.6-3.6%. Notably, these numbers had already been lowered from the projections in the September 2024 report.
The Monetary Council highlighted four alternative risk scenarios around the baseline projection in the March Inflation Report. The risk scenarios featuring rising trade tensions and a deterioration in emerging market sentiment are consistent with higher inflation and a lower growth path. The scenario that assumes the easing of geopolitical tensions is consistent with stronger economic growth and lower inflation than the baseline. In the scenario envisioning a fiscal stimulus in Europe, both the growth and inflation paths might be higher.
In addition to the highlighted scenarios, the council discussed alternative scenarios with persistently high inflation expectations, faster investment growth and a faster improvement in productivity, the Inflation Report states.
This article was first published in the Budapest Business Journal print issue of April 4, 2025.
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