CEE at a crossroads: growth, consolidation, and divergent policies

Developments since the beginning of October illustrate ongoing divergence within the CEE region. The Czech Republic is experiencing a beneficial combination of a growth revival and weakening inflation, giving the CNB flexibility, albeit a flexibility they are using with caution. Slovakia is sacrificing short-term growth to implement necessary structural fiscal reforms. Meanwhile, Hungary continues its protracted fight against inflation through tight monetary policy, and Bulgaria is enjoying robust growth while facing pressure to tighten its fiscal stance to manage overheating risks.

The Czech Republic: a surprising acceleration met by monetary caution

The Czech Republic delivered a highly notable macroeconomic release for Q3. Its economy expanded 0.7% quarter-on-quarter, significantly surpassing market forecasts of 0.3%. On a year-on-year basis, real GDP rose by 2.7%.  

While still awaiting details about the composition of GDP growth, we expect that the momentum was primarily driven by robust domestic demand, particularly household final consumption expenditure and gross capital formation. A key significance of this data point is that it suggests a return to stronger productivity growth, given stagnant employment levels despite the strong economic expansion. 

On the inflation front, national headline CPI rose to 2.5% year-on-year in October (up from 2.3% the previous month). Despite the latest uptick, Czech consumer price growth stays firmly within the central bank's tolerance band (and should continue to do so during the coming quarters). We maintain our forecast of 2.2% CPI inflation in 2026.

The Czech National Bank (CNB) maintained a cautious monetary stance at their November meeting. The decision to hold the key short-term rate stable (at 3.50%) and keep monetary conditions tight stems from persistent risks to long-term price stability, driven by elevated services inflation, above-average wage growth, and rising property prices. The outlook suggests that the rate-cutting cycle, which brought real rates into positive territory, has entered its terminal phase and the chance for another rate cut appears very low.

Slovakia: aggressive fiscal consolidation dominates the outlook

Slovakia's economic narrative has been defined by decisive and extensive fiscal policy intervention aimed at addressing ballooning deficits and securing long-term public finance sustainability. The Draft Budgetary Plan for 2026, released in October, outlined an ambitious consolidation package designed to reduce the deficit to close to 4% of GDP in 2026 (we see, however, 5% as more realistic). The plan is the third step in a row responding to the country's Excessive Deficit Procedure requirements.  

The package is extensive, targeting both revenue and expenditure sides. On the revenue side, increased health insurance contributions for employees, the elimination of contribution holidays, and higher taxation of negative externalities such as gambling are on the table.

On the expenditure side, measures include a freeze of public administration payrolls (reducing the wage bill), a cut in operating expenditures across ministries, and significant changes to social transfers, including suspending the indexation of 13th-month pensions and shortening the duration of unemployment benefit payments.

The aggressive fiscal consolidation is the primary factor driving the expected slowdown in Slovakia's growth trajectory. Our projection for real GDP growth of the struggling economy is a modest 0.8% in 2026.  Moreover, inflation is projected to rise to 4.2% this year and to stay at that level also in 2026. Hence, the implication of the adopted consolidation packages is a trade-off: fiscal confidence is bolstered, but economic growth is constrained in the near term.

Hungary: policy stasis amidst persistent inflation

In Hungary, the central focus remains on controlling inflation, which has persisted above the target range. The annual inflation rate for September 2025, released on October 8, remained unchanged at 4.3% year-on-year.

In its meeting on October 21, 2025, the Hungarian National Bank (MNB) left their base rate unchanged at 6.50% for the thirteenth consecutive month. Central bankers justified the policy decision by citing persistent inflation above the 2.0% - 4.0% target band and elevated household inflation expectations.

We forecast modest, consumption-driven growth of 0.5% in 2025, accelerating to 2.4% next year. The Hungarian economy grew by 0.6% year-on-year in Q3, driven primarily by the services sector (especially information and communication). However, the economy stagnated on a quarterly basis, slowing from the previous quarter's 0.4% growth.

Bulgaria: robust growth and calls for fiscal tightening

Bulgaria presents a picture of stronger economic health. We predict robust real GDP growth of 3.0% in 2025 and 2.6% in 2026, driven by domestic demand and supported by the momentum from expected euro adoption.

Inflation in Bulgaria is projected to remain elevated, averaging around 3.4% next year. The latest released data for September 2025 showed annual HICP inflation rate at 4.1% yoy, a rise from 3.5% in the previous month.

Fiscal policy in Bulgaria is expected to remain expansionary throughout 2026, largely due to indexation practices increasing current spending. We forecast the budget deficit to climb to 4.2% of GDP next year, up from 3.0% in 2025.

Box 1 – Gold reserves surge amid geopolitical uncertainty in Central and Eastern Europe

Gold prices are reaching new highs, with central banks playing a notable role in this trend. They increasingly regard gold as a safe haven and a reliable store of value that complements foreign exchange reserves. Gold’s key attributes include the absence of credit risk, resilience against monetary mismanagement, durability, and a low correlation with major currencies. These features could make it a useful hedge and a tool for diversification.

Since the outbreak of war in Ukraine, central banks have accounted for a significant share of the increased demand for gold (see figure CEE1). This draws attention to countries in Central and Eastern Europe, which are most exposed to geopolitical risks linked to the invasion. The reported figures are likely an underestimate, as countries such as Russia have stopped disclosing gold purchases since 2022, although it is almost certainly a major buyer.

In Russia, the motivation is to diversify into assets that cannot be seized or sanctioned. This approach is likely being adopted by other central banks that are concerned about potential sanctions. In contrast, for countries in Central and Eastern Europe, gold primarily serves as protection against geopolitical shocks.

The Czech Republic began building its gold reserves in 2023 (see figure CEE2). The central bank aims to accumulate 100 tonnes of gold and has already reached two thirds of this target. It follows a conservative strategy and does not speculate on price. Instead, it purchases gold gradually, applying the “averaging effect”. This method is used by investors to build large portfolios while reducing the risk of poorly timed acquisitions. This explains why Czech gold purchases continued in the third quarter of this year despite elevated prices.

Hungary made a significant leap in its gold holdings during the pandemic. However, for now it does not appear to be expanding its reserves further. It is worth noting that Hungary already holds a gold reserve comparable to Poland’s when adjusted for the size of its economy.

According to official figures, Poland’s central bank is the largest gold buyer globally this year in absolute terms. With the rise in gold prices, more than 20 percent of the National Bank of Poland’s reserves now consist of gold. In early September, Governor Glapinski proposed increasing this share to 30%. However, the current high price appears to be prompting caution in further purchases.

Bulgaria acquired an additional 2 tonnes of gold in the third quarter, marking its largest purchase since 1997. This represents less than 1% of its total reserves and is just linked to its preparations for joining the Eurozone, which requires the Bulgarian National Bank to transfer part of its reserves to the European Central Bank.

The primary role of foreign exchange reserves is to enhance a country’s financial credibility and mitigate the risk of sudden capital outflows. Reserves may also be used to support financial market stability or the banking sector. From this perspective, holding gold is not essential. Major currencies are sufficient for interventions, especially the euro in the context of Central and Eastern Europe. However, as part of portfolio optimisation, trying to increase the value of the reserves, gold can add value when balanced with other stable and liquid assets. Excessive allocation to gold may undermine diversification strategies.