Hungary's central bank reset its inflation aim, saying the goal will shift to 2.5% starting in 2028 from the current 3%. The 1 percentage point tolerance band around that target stays in place.
Governor Mihaly Varga announced the change on Tuesday after policymakers halted their rate cutting cycle and kept the key rate at 5.5%. He said the shift aligns Hungary with peers in the region and the European Central Bank, bolsters the euro-adoption drive, steadies the forint, and reduces funding costs.
Officials framed the lower target as the first step toward replacing the forint with the euro early in the next decade. Bloomberg had reported earlier this month that the adjustment was on the way.
The forint initially climbed to its strongest level in nearly a month after the announcement, then flipped to trade 0.4% weaker against the euro. Viktor Szabo of Aberdeen Investments called the shift supportive, saying, "Any announcement that strengthens the country's euro area convergence is positive for the market."
Varga said the central bank will move to eight interest rate decisions per year - matching the ECB's cadence - instead of its current monthly meetings.
He described upcoming decisions as "cautious and data-driven," which he said gives the Monetary Council room to either hold or reduce the key rate in the months ahead. "When it comes to the data-driven mode, it leaves room for the Monetary Council in the next months to decide whether it chooses to hold or cut," he said.
Annual headline inflation edged up to 1.3% in August, close to the slowest pace in a decade and below the bottom of the tolerance band. That benign backdrop gave the central bank room to dial down its inflation target without changing course on policy.
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The decision to pause followed three straight quarter-point cuts since June. It also came after the US Federal Reserve and the European Central Bank raised rates earlier in the month, as inflation pressures were amplified by higher energy costs tied to the US-Iran war. Hungary's benchmark remains well above peers in the Czech Republic and Poland, where key rates are 3.75% and inflation is faster.
In its new projections, the bank lifted its view for average inflation next year to 3.1%, up from 2.3% in June. Policymakers now see 2028 inflation averaging 2.5% - the same as the new target - versus a prior forecast of a 3% average.
Prime Minister Peter Magyar, elected in a landslide in April after Viktor Orban's 16-year rule, has set a goal to meet euro area entry criteria by 2030. His administration plans to file the 2027 budget next month together with economic targets covering the remainder of the decade. Investors see that package as a test of how committed the government is to the euro path.
A focal point is the budget deficit, with this year's shortfall estimated at 7.5% of gross domestic product and needing to be brought down to 3% to meet euro rules. For now, investors are inclined to trust Magyar, spurring a convergence trade in Hungarian assets. The resulting forint strength has helped cool inflation by making imports cheaper.
A lower inflation target from 2028 and a steady 5.5% key rate say a lot: the bank wants a tighter anchor for prices while keeping flexibility. Fewer, scheduled decisions - eight a year instead of monthly - and the explicit nod to a cautious, data-led approach mean moves will follow the numbers, not a preset script.
The forint's back and forth, the upcoming 2027 budget draft, and the push to narrow the deficit from about 7.5% toward 3% will shape Hungary's euro trajectory into 2030. That map influences both currency swings and local borrowing costs.
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