Current economic developments in Central and Eastern Europe have been somewhat overshadowed by important political events. Most notably, the presidential elections in Poland were won by the opposition candidate, Karol Nawrocki. This will lead to a period of several years of cohabitation in Poland, during which time a left-liberal, pro-European government will struggle to pass important legislation becaues of the presidential veto. This may include postponing fiscal consolidation, which, in our view, is not good news for the zloty and Polish government bonds. The second event was Bulgaria's qualification for admission to the eurozone. The final Convergence Report has been approved by the European Commission and the ECB, and the country is expected to join the currency area in January 2026.

As for cyclical developments in selected Central and Eastern European countries, these have recently been mixed, resulting in revisions in both directions.

Update economic perspectives

Let’s start with Bulgaria, which continues to show solid economic momentum. Our growth forecast has been revised upwards due to the confirmation that the country will join the euro area soon. We think that this certainty is expected to lead to stronger inflows of foreign direct investments and to further compression of the sovereign credit spreads (which is already happening). Both should accelerate the convergence process.

In the meantime, inflation is expected to remain above 2%, but no significant spikes are anticipated. The convergence process is expected to accelerate without causing excessive inflation.

Regarding the Czech economy – it has clearly surprised on the upside in Q2 2025. The latest relatively solid data from manufacturing and surprisingly strong retail sales confirm the strong start in Q2 2025. Our call for a slowdown in Czech growth momentum due to global trade uncertainty now seems less certain. Currently, the data (our nowcast) point to a Q2 growth figure close to 0.5%. We are now expecting a slowdown of quarterly dynamics to approximately 0.2%. Hence judging just from the data, the risks associated with our GDP projection would be tilted slightly to the upside.

Czech inflation came in higher at 2.4% yoy in June (2.1% expected) as food prices and service inflation surprised to the upside. On the other hand, energy and fuel prices help to keep the inflation in the toleration band this year (though the Middle East conflict is a source of uncertainty). Looking ahead, we believe services may push the year-on-year inflation even higher in June (2.8%). Later on, slightly slower food inflation should help inflation come back closer to the 2.0% target.

While in May the CNB cut the policy interest rate by 25 bps to 3.50%, the subsequent comments were clearly hawkish, signalling the bar for further interest rate cuts is rather high. Putting that together with slightly higher service inflation and rather favourable data from the real economy, we now see only one additional interest rate cut in Q4 2025 and then a long-term stability at those levels consistent with our estimate of the neutral rate (3.0-3.5%).

Speaking about Hungary – its growth forecast for 2025 has been downgraded slightly due to weaknesses in confidence indicators and the manufacturing sector. However, fiscal stimuli are expected to support growth in 2026, especially with upcoming parliamentary elections.

Hungary’s inflation dynamics remain complex and continue to challenge the central bank’s policy stance. In May, headline inflation rose to 4.4% year-on-year from 4.2% in April, slightly above expectations and remaining outside the National Bank of Hungary’s (MNB) tolerance band of 3% ±1%. While core inflation moderated slightly to 4.8%, it remains elevated. Within non-core components, food, electricity and gas ticked up notably. Within core components, there were large upticks in hospitality and leisure. The global oil price increases linked to geopolitical tensions in the Middle East pose medium-term inflationary risks. Looking ahead, inflation is expected to moderate to around 3.7% in July, aided by base effects and new price caps on household goods. However, inflation may fluctuate in the 3.7–4.2% range in the second half of 2025, with upside risks stemming from high wages, strong domestic demand, and potential pre-election fiscal loosening. Against this backdrop, the NBH is likely to maintain a “wait-and-see” approach, with the next potential 25 bps rate cut not expected before late autumn or December, conditional on further disinflation and continued forint stability.

Concerning Slovakia - its growth forecast was revised downward due to uncertainty in the external environment and weakening domestic demand as well. Uncertainty also weighs on consumer confidence. There are structural challenges in industry in the medium term - particularly in the automotive sector, which faces capacity constraints. Moreover, weaker external demand is weighing on momentum too. Still, there are upward risks, which are stemming from the possible delay in US tariff implementation, the construction sector’s benefits from EU - RRF funds utilisation and the recovery in the real estate sector.

The Slovak inflation remains elevated due to sticky service inflation as the lack of labour is an important factor. Higher taxes (VAT, CIT and new transactional tax) create further inflationary pressures. Looking forward, 2026 inflation will be influenced by the expected phase out of energy subsidies for households, probably prioritising only the low-income families. All these factors will create upward pressure on inflation. We believe food prices will be volatile and remain a negative risk factor for the outlook for 2026.

Box 1 – Crossing the Rubicon: Bulgaria set to join the eurozone

On 4 June 2025, the European Commission and the ECB published ad hoc Convergence Reports confirming that Bulgaria meets the criteria to adopt the euro, paving the way for accession on 1 January 2026 (see also our Economic Brief of 4 June). This marks the culmination of a long and politically turbulent journey since Bulgaria joined the EU in 2007. Despite early enthusiasm, deeper integration was delayed by shifting political priorities and repeated government changes. Although Bulgaria often came close to fulfilling the Maastricht criteria, it wasn’t until 2018 that the political momentum to pursue euro area membership—alongside Croatia—began to build. While Croatia joined in 2023, Bulgaria’s progress was hindered by political instability and inflation concerns. A renewed push in 2025, supported by improved macroeconomic indicators, led to a positive assessment and a clear timeline for euro adoption.

Eurozone membership is expected to deliver substantial macroeconomic and institutional benefits. Bulgaria has operated under a currency board regime since 1997, with the lev pegged to the euro and no independent monetary policy—effectively importing ECB policy without access to its financial mechanisms. In this context, euro adoption is a logical and long-overdue step, similar to the experience of the Baltic states. Benefits include reduced transaction costs, lower risk premiums, improved credit ratings, and increased investment. Integration is also expected to enhance fiscal discipline, anchor inflation expectations, and accelerate institutional convergence, reinforcing Bulgaria’s role in EU governance.

From Doubt to Support

According to the biannual Eurobarometer, fewer than 50% of Bulgarians currently support joining the eurozone (see figure CEE1). Enthusiasm declined sharply following the European sovereign debt crisis, with support falling from 60% pre-crisis to just 40% afterwards. This scepticism is mirrored in other key CEE economies, particularly among Polish and Czech citizens. Hungary stands out as a notable exception, where public support remains stronger.

Nonetheless, support in Bulgaria is expected to grow. In most cases, euro adoption leads to a significant increase in public approval of the common currency. Slovakia and Croatia are clear examples of this shift in sentiment following accession.

Euro Adoption in Other CEE Countries: Still a Distant Prospect

The euro remains a contentious issue in the Czech Republic. While the current governing coalition has largely sidelined the topic, the upcoming autumn parliamentary elections are unlikely to bring change. Neither of the two leading parties, ANO and ODS, support euro adoption, citing low public support despite strong backing from the business community. Pro-euro parties such as the Mayors, TOP 09, and the Pirates advocate for joining the eurozone by 2029/2030, but their limited influence as junior coalition partners makes this timeline overly optimistic. Meanwhile, parties like SPD continue to favour retaining the koruna.

Economically, the Czech Republic is well-positioned to join the eurozone, having met the Maastricht criteria and aligned closely with EU standards. Technically, the process would take around three years, including at least two years in ERM II with a fixed exchange rate. However, recent experiences in Croatia and Bulgaria suggest that prior accession to the banking union could further delay the process. Ultimately, euro adoption remains a political decision, and without a shift in priorities, the mid-2030s is the earliest realistic timeframe for accession.

According to the European Commission’s latest Convergence Report, Poland does not currently meet the Maastricht criteria and is unlikely to do so in the near future. More importantly, there is a clear lack of political will. Finance Minister Andrzej Domański recently reaffirmed that Poland is not preparing to join the eurozone, arguing that maintaining an independent currency is optimal. Even if the ruling coalition were supportive, it lacks the two-thirds majority in the Sejm required for euro adoption. The main opposition party, PiS, remains firmly opposed. Furthermore, National Bank of Poland Governor Adam Glapiński has long resisted the idea, and the recent election of President Karol Nawrocki suggests that a similarly eurosceptic successor could be appointed when Glapiński’s term ends in 2027.

In Hungary, next year’s elections could prove decisive. Prime Minister Viktor Orbán and his Fidesz party have consistently opposed euro adoption. However, Fidesz is currently trailing behind the emerging Tisza Party, led by Péter Magyar. Magyar supports euro adoption as a means to enhance economic stability and predictability for businesses. Still, even with political will, Hungary would first need to restore fiscal discipline and improve its institutional framework to meet the convergence criteria.