Czechia

In Czechia, the most consequential developments revolve around an unexpected hawkish pivot by the central bank. Although headline consumer inflation decelerated to 2.1% in May, aligning perfectly with the CNB's target, this figure was depressed by a 1.9% year-on-year decline in volatile food prices. Conversely, inflation in the transport sector surged to 9.4%, driven by the Middle East energy shock, while core inflation remains elevated at an uncomfortable 2.9%. Primarily on the back of recently declining fuel prices, we have reduced our forecast for average HICP inflation in 2026 from 2.3% to 2.1%.

On 18 June, the CNB raised its key interest rate by 25 basis points to 3.75%. Six out of seven members of the Bank Board voted in favour of this decision. The “shift in mindset” towards rate increases was largely due to two factors: the conflict in the Middle East and very strong wage growth (+6.4% year-on-year in real terms in Q1 2026).

Governor Michl’s cautious comments following the vote pointed to a reluctance to rush into further interest rate increases. He did not explicitly state that the next vote would be between holding rates steady and raising them. We expect the current 2W repo rate to remain stable for an extended period, after which a slight decline to 3.50% may follow in the second half of 2027, once inflationary pressures have subsided.

Hungary

In Hungary, the political landscape has experienced a seismic shift with the electoral victory of the Tisza party, bringing an end to the 16 year rule of Viktor Orbán. This transition of power has immediately restored a degree of international investor confidence, reflected in the forint rallying to its strongest levels in four years. The incoming administration's immediate priority is the implementation of comprehensive anti-corruption reforms required to unlock 16.4 billion EUR in frozen EU cohesion and recovery funds. These funds are anticipated to begin flowing in the fourth quarter of 2026.

On the fiscal front, the new government faces a monumental challenge. The inherited budget deficit is projected to reach a perilous 6.8% of GDP in 2026, driven by aggressive pre-election spending by the previous administration. Fitch Ratings has affirmed Hungary’s ‘BBB’ long-term issuer default rating with a negative outlook, underscoring concerns about fiscal sustainability and policy credibility. In response, the Finance Ministry announced a comprehensive audit of public finances in June, with the intention to rewrite the 2026 budget to eliminate ineffective corporate tax allowances while preserving popular household support measures. We expect the Hungarian public budget deficit to shrink gradually, from 5.5% of GDP in 2027 to 3.5% in 2029.

Meanwhile, the inflation environment provided a positive surprise: May HICP inflation slowed to 2.3% year-on-year, driven by a decline in household energy costs and moderating food prices (see figure CEE1). Our updated forecast for average HICP inflation in Hungary stands at 2.6% for 2026, followed by a temporary uptick to 3.7% in 2027. 

In response to the disinflationary trend, but mindful of exchange rate volatility, we now expect the Magyar Nemzeti Bank to gradually cut its base rate to 5.50% by the end of this year, 4.50% by the end of 2027 and 4.00% by the end of 2028. Driven by the anticipated influx of EU capital and resilient domestic consumption, the real GDP growth is forecast to gradually recover to 3.0% in 2028.  

Slovakia

Slovakia is navigating a period of acute institutional friction, culminating in recent severe warnings from European authorities. The European Parliament issued a "final warning" resolution, which highlighted concerns over democratic standards, judicial independence, and the protection of minority rights. This raises the prospect that Brussels may activate the rule-of-law conditionality mechanism. The activation of this mechanism would suspend Slovakia's access to vital EU structural funds and Recovery and Resilience Facility (RRF) disbursements.

Domestically, inflation declined marginally, easing to 3.8% in May from a three-month high of 3.9% in April. However, this headline deceleration masks underlying structural pressures; transport costs soared by 9.4% due to a nearly 20% spike in fuel prices, while housing and utility costs accelerated by 6.7% year-on-year. The combination of persistently high living costs and aggressive fiscal consolidation measures is weighing heavily on domestic demand. Despite a painful fiscal consolidation under way, the fiscal outlook remains similarly grim, with the general government deficit expected to rise from 5.0% predicted for 2026 to 5.4% in 2027 (see figure CEE2). 

Bulgaria

Bulgaria is contending with a resurgence in price pressures. In May 2026, the annual inflation rate (CPI) accelerated to 6.3%, confirming the highest level recorded since August 2023. This inflationary spike was almost entirely driven by external energy shocks, which caused a staggering 21.6% year-on-year increase in transportation costs, alongside notable increases in the hospitality and utility sectors. A positive factor in relation to expected future inflation trends is the house prices segment in Bulgaria, where we are revising down our forecast for year-on-year growth from 9% to 7% this year and from 6.5% to 6.0% in 2027.

Despite these inflationary headwinds, the broader economic outlook remains comparatively robust. Real GDP, supported by strong public consumption, resilient wage growth, and the continued absorption of EU funds, is still forecast to expand by 2.6% in 2026 and only marginally slow to 2.5% in the next two years.

Poland

In contrast to Bulgaria, Poland experienced a highly favourable disinflationary surprise. The annual inflation rate dropped to 3.1% in May 2026, falling significantly below the market consensus of 3.7%. This moderation was primarily driven by an unexpected month-on-month deflation in food prices, offsetting rising costs associated with the global fuel shock. Acknowledging this stabilisation, the National Bank of Poland maintained its benchmark reference rate at 3.75% in early June. For the whole of 2026, we forecast the Polish average HICP inflation to drop to 3.2% with another decline to 2.6% following in 2027.

Economic activity remains exceptionally strong, with the statistics office confirming a robust 3.5% year-on-year GDP growth in the first quarter of 2026. Full-year GDP growth is also projected to exceed 3% in the coming years, fuelled by highly resilient private consumption, low unemployment, and a surge in public investment co-financed by EU funds. However, the expansionary fiscal stance is forecast to push the general government deficit to at least 6.5% of GDP in 2026 with only a mild decline thereafter. Poland is already subject to the EU’s Excessive Deficit Procedure, reflecting persistent fiscal imbalances and the need for gradual consolidation.

Romania

Romania is currently facing the most acute and multifaceted crisis in the region, characterised by simultaneous political crisis and macroeconomic deterioration. After the governing coalition imploded in May 2026, plunging the nation into profound political paralysis. Repeated attempts to form a new government have so far failed. The implementation of the 2026 budget and the timely absorption of €7.3 billion in vital EU RRF funds are threatened. The lack of a stable government to execute planned structural reforms has severely undermined investor confidence and complicated efforts to manage a ballooning fiscal deficit, which is projected to be only marginally better than that of Poland (6.2% of GDP this year, followed by only a gradual decline thereafter).

The economic fallout from this instability is a notable downward revision of Romania's 2026 GDP growth forecast. The new, near-stagnation forecast is the result of aggressive fiscal consolidation efforts severely depressing household consumption, coupled with the crippling effects of the region's highest inflation rate. In May, Romania's annual inflation surged to 10.9%, the highest level recorded since April 2023, driven by a 19.2% spike in fuel prices and a 13.5% increase in service costs.  For the full year 2026, we forecast the Romanian average HICP inflation close to 8.0%. The National Bank of Romania has been forced into a defensive posture, holding its benchmark interest rate at an EU-high 6.50% throughout May and June to combat the entrenched price pressures and stabilize the local currency. With domestic demand deteroriating, Romania's short-term economic outlook remains highly vulnerable.

Box 1 –  Inflation Shock Momentum in CEE: A Warning Signal for Central Banks

As tensions in the Strait of Hormuz have begun to ease and oil prices have declined from their recent peaks, the immediate energy-driven inflation shock appears less acute than was feared a few weeks ago. This has shifted the policy debate from crisis management toward risk assessment: whether the earlier surge in inflation will prove to be temporary, or whether second-round effects could still materialise. Despite improving external conditions and growing expectations of a diplomatic resolution to the Iran conflict, some central banks have already tightened monetary policy, suggesting a precautionary approach to anchor expectations and safeguard credibility. With the inflationary episodes of 2022 and 2023 still fresh in mind, policymakers appear reluctant to rely solely on favourable external dynamics and are instead acting pre-emptively to mitigate potential persistence in price pressures.

To detect persistent inflationary pressures at an early stage, economists at the Federal Reserve Bank of San Francisco have developed the Inflation Shock Momentum, or ISM, index.¹ This measure counts the share of inflation components that have surprised either to the upside or downside for at least three consecutive months relative to an AR(1) benchmark, producing an index that ranges between minus one and one. An ISM reading of minus one indicates that all components have consistently surprised to the downside, while a reading of one signals that all components have persistently surprised to the upside. While a few months of headline inflation data are typically insufficient to establish persistence, the authors argue that analysing detailed subcomponents allows for earlier detection. The authors state that if many components simultaneously show signs of persistence over a short period, signals that would be statistically weak in isolation, this can be interpreted as clear evidence of underlying momentum.

Figure CEE3 shows the GDP-weighted ISM for the main CEE economies with their own currencies, namely Poland, Hungary, the Czech Republic and Romania, alongside that of the euro area. Shock momentum was notably higher in CEE than in the euro area in the years preceding the pandemic, serving as a leading indicator of stronger core inflation. The gap would be even larger if the comparison were restricted to the major euro area economies, reflecting the relatively low persistence and dispersion of inflation in countries such as Italy and France. This is not surprising. Labour supply was a key constraint on growth in CEE during this period, with a persistently higher share of firms reporting labour shortages than in the euro area, with the exception of Romania. In some CEE countries, the ISM index for services was nearly as elevated before the pandemic as it was during the inflation peak of 2022 and 2023. During the pandemic itself, the ISM index also took longer to decline in CEE than in the euro area. Following this inflation wave, however, both the breadth and persistence of inflation, as captured by the ISM, fell more quickly in CEE, in line with earlier and more decisive policy tightening by regional central banks.

At first glance, the ISM index does not appear to be a strong predictor of the magnitude of an inflation episode, but it does offer valuable insight into turning points. Focusing on core inflation, the ISM tends to rise ahead of, or at least concurrently with, month-on-month price increases, and it likewise signals downturns during disinflation phases, as shown in Figure CEE4. For some countries, it provides a lead of several months before the first significant movement in prices. The ISM may therefore serve as a useful supplementary tool for tracking inflation persistence in CEE economies.

With only three months of data available since the onset of the Iran related shock, it is still too early to conclude that inflation is becoming broad-based. It is also important to recognise that the starting point differs from that of 2022. Labour markets in CEE are less overheated. Elevated household savings, particularly in the Czech Republic, may sustain demand and add to inflationary pressures. At the same time, constrained public finances are likely to limit fiscal support, reducing the risk of strong demand-driven inflation shock.

Footnotes: 

1/ Lansing, Kevin J., and Adam Hale Shapiro. Measuring Inflation Shock Momentum. No. 2026-10. 2026.