Hungary Keeps Key Rate Steady Amid Rising Inflation Expectations

Hungary's central bank kept its benchmark interest rate at 6.5% for the 10th month, as inflation rebounded to 4.6%. The key rate is the highest in the EU, tied with Romania. The central bank forecasts inflation to average 4.7% this year, with the annual gauge not returning to the 3% target until 2027. The forint has gained 3.1% this year, the best performance in emerging markets.

Hungary's National Bank of Hungary (MNB) kept its benchmark interest rate unchanged at 6.5% for the 10th consecutive month, as reported on July 22, 2025 [1]. This decision aligns with the expectations of all 19 economists surveyed by Bloomberg, and it maintains the key rate as the highest in the European Union, tied with Romania.

The decision comes amidst a rebound in inflation, which accelerated to 4.6% in June, breaching the central bank's tolerance band of 4% [1]. The MNB forecasts that inflation may average 4.7% this year, and it will not return to the 3% target until 2027 in a sustainable manner [1]. Household inflation expectations are nearly double the headline rate, driven by rising costs of food and services despite government interventions [1].

The hawkish monetary policy has contributed to stabilizing the forint, which has gained 3.1% this year, the best performance in emerging markets after the Russian ruble [1]. However, the economic outlook remains bleak, with gross domestic product (GDP) contracting in the first quarter and the central bank forecasting 0.8% annual economic growth for 2025 [1].

The MNB's cautious approach reflects its concern about upward-pointing inflation risks despite a deteriorating economic growth outlook. Policymakers may reduce interest rates toward the end of the year, with forward-rate agreements suggesting around 36 basis points in cuts in six months [1].

In the broader context, the week ahead brings several significant global events that could impact FX and bond markets. The U.S. PMI data, ECB decision, and Japan's Upper House elections are among the key events to watch [2]. The ECB is widely expected to leave its policy rates on hold, while Japan's elections could unseat Prime Minister Ishiba and delay trade talks with the U.S. [2].

References:
[1] https://www.bloomberg.com/news/articles/2025-07-22/hungary-holds-key-rate-steady-for-10th-month-to-anchor-inflation
[2] https://www.marketscreener.com/news/week-ahead-for-fx-bonds-focus-on-u-s-pmi-ecb-decision-japan-elections-ce7c5cdfdf8dfe22