Important government and MNB decisions are coming: one step closer to euro-convergence?
An introductory period for the Tisza government ended in August. The three most important Fidesz-appointed top public officials, who represented a permanent threat to government activities, have been replaced, and conditions for EU funding have also been met, opening the way to the overwhelming majority, or may be all, of the so-far blocked RRF and cohesion funds. This means the stabilization of the Tisza government and progress towards restoring the rule of law, the latter mainly through anti-corruption measures and efforts to reclaim large amounts of wasted and stolen public assets.
Tisza’s popularity is still at extremely high levels, but some erosion has already started, due to disagreement over a key personal decision, dissatisfaction about the lack of immediate fiscal benefits after the government changeover and also about the low speed of prosecution of those who stole public money under the Fidesz regime. In addition to Fidesz and its allies, a good part of leftist-liberal social media influencers is also harshly critical of the Tisza government, in part doing their natural job but in part disappointed about being left out of the new governing majority.
Tisza is taking a characteristic stand in foreign policy, which is heavily pro-European, ready for compromise instead of permanent confrontation, but also considerate of national interest. Examples are its endeavor to formally join the European People’s Party, its clear stand with Ukraine and against Russia, and a constructive negotiating style in the EU and with neighboring countries. These features are combined with insistence on the rights of Hungarian ethnic minorities abroad, on maintaining firm border control to keep out illegal migrants, on the EU closing down its Article 7 procedure against Hungary, and on reclaiming the amounts paid as a penalty set by the European Court in relation to migration policies.
The worst possible outcome has been avoided in the energy sector, as electricity production at the Paks nuclear power plant was restored and stabilized near full capacity. Implementation of a long-term strategy has been started with a program to build new wind turbines, and new EU funds will be partially used to modernize the domestic electricity grid. Yet the situation is not problem free, as energy import prices are rising, even though Hungary stands better than the European average in filling up its gas tanks for winter. Hungary’s most recent political turn away from Russia is unlikely to endanger its oil and gas imports, although it will probably not remain entirely without consequences.
The growth picture is mixed, but on the whole, the economy remains stronger than last year. Industry is strengthening on the increasing export of cars and IT hardware, and consumer demand is still robust, fueled by the positive income shock of the election year. Bank lending has been accelerating, and the new EU funds are expected to strengthen fixed investment spending later this year and in 2027. However, agriculture has once again been hit hard by horrible weather conditions, a number of industrial activities remain weak, construction is under pressure mainly for political reasons, and tourism is being held back materially by the strong forint.
The government has handed in to parliament its proposal to amend the 2026 budget. This was hardly more than a proper technical accounting of the status of government finances, already known from the Finance Ministry’s July forecast, plus the introduction of a limited amount of savings out of spending on the government’s own operations. The amended deficit target appears somewhat unambitious: further significant stabilization, structural reforms or the previously promised euro-convergence roadmap have been skipped for now, to appear in the draft 2027 budget, due at some point in October.
Inflation moved slightly higher in August, from the surprisingly low July number. Importantly, core inflation and also the headline rate according to the EU’s HICP standard, were both materially higher than the headline rate by national definition. We expect a further moderate rise in the coming months on rising fuel prices, a somewhat weaker forint, and a bit later, due to a likely upturn of food prices.
The MNB reduced its base rate once more in August, as expected. But its easing is very likely to stop in September, and indeed, we see no more rate cuts coming before end-2026. The MNB is believed to have verbally intervened through a Bloomberg report on a "rumor" that it may stop easing in September, in addition to reducing its medium-term inflation target as a step towards euro-convergence. This intervention came just at the point when the forint started to weaken on external conditions, and so it appeared to give away valuable information on the Bank’s preference regarding the EURHUF exchange rate.
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