Hungary’s headline inflation dropped to its lowest level in nearly eight years in January, boosting expectations that the central bank may begin lowering the EU’s highest key interest rate at the end of February.
Annual inflation fell to 2.1% from 3.3% in December, data released on Thursday by the Budapest statistics office showed.
This marks the first time in five years that inflation has fallen below the central bank’s 3% target and is the lowest reading since March 2018. A Bloomberg survey had forecast a 2.4% rate.
Service-sector costs, a key focus for the central bank in gauging inflation expectations, slowed to an annual rate of 5% in January from 6.8% in December, with monthly service prices rising 0.4%.
Governor Mihaly Varga said last month that corporate price adjustments at the start of the year would play a “decisive” role in the central bank’s decision on whether to begin monetary easing at its next policy meeting on 24th February.
The National Bank of Hungary kept its key rate at 6.5% in January for the 16th consecutive month, citing still-elevated service costs.
Nearly all indicators now suggest a cut in the key interest rate, which is currently tied with Romania for the highest in the EU. Hungary’s economy has stagnated for much of the past four years, with GDP growing just 0.4% in 2025.
Meanwhile, the Forint has strengthened to its highest level against the Euro in two years, and bond yields have fallen. Asset prices have been supported by hawkish monetary policy, a broad rally in emerging markets, and expectations around upcoming elections.
Prime Minister Viktor Orban’s government has been pushing the central bank to lower interest rates to boost sentiment ahead of the 12th April elections, with the ruling Fidesz party trailing in most polls.
Governor Mihaly Varga, a lifelong Fidesz member appointed by Orban last year, has resisted political pressure, pledging to make rate decisions independently.
In December, the central bank revised its monetary-policy guidance, shifting from outright ruling out rate cuts to a meeting-by-meeting approach, with decisions based on incoming economic data.
Prior to the release of the inflation figures, money market traders had anticipated one or two 25-basis-point rate cuts over the next three months, according to forward rate agreements.