Hungary Seeks Euro Path as Central Bank Cuts Inflation Target

The Hungarian central bank has lowered its inflation target to 2.5% from 3%, effective 2028, in a move that signals Hungary's commitment to adopting the euro.

This decision has boosted investor appetite for local bonds, which have outperformed Polish and Romanian peers this year. The benchmark 10-year bond now trades at a yield of 5.64%, below Poland's 6.16% and Romania's 7.29%. Deutsche Bank reports that overseas investors have poured $13.5 billion into the local bond market in the year-to-date, including $10 billion after Peter Magyar's April election victory.

Analysts say Hungary has room for yields to fall further if it delivers on its deficit reduction plans and receives €16 billion of EU funds unfrozen by Brussels. They also point out that the lower inflation target supports the long end of the bond curve, which could benefit from a credible euro adoption story.

Investors are closely watching the government's 2027 budget and medium-term fiscal plan to see how it will cut the deficit towards the 3% level required to join the euro. The gap is projected at 7.5% of economic output this year, making it a tough challenge.