The Hungarian political transformation and economic liberalization

The April parliamentary elections delivered a major political sea change. The Tisza Party, led by Péter Magyar, secured a decisive two-thirds constitutional supermajority, effectively ending the Viktor Orbán era. This political earthquake was facilitated by a record-high voter turnout, signaling a widespread national rejection of the previous establishment in favor of a centrist, pro-European alternative.

The incoming administration will likely focus on the restoration of the rule of law and the modernisation of the business environment. A central pillar of this strategy is the immediate unblocking of approximately EUR 18–19 billion (11% of GDP) in frozen European Union funds. The Tisza Party intends to achieve this by joining the European Public Prosecutor's Office and conducting a rigorous audit of previous public procurement practices.

The fiscal policy outlined by the Magyar government represents a shift toward progressivity and the support of small and medium-sized enterprises (SMEs). Proposed measures include lowering the personal income tax rate on minimum wage earners and a 1% asset tax on wealthy individuals. This redistributive approach is designed to increase household disposable income and domestic demand, which have been stagnant or contracting in recent years. We forecast Hungarian real GDP growth at 1.5% year-on-year in 2026 and 2.5% in 2027, implying a significant acceleration relative to 2025 despite the adverse effects of the ongoing US–Iran conflict.

The financial markets responded to the election results with significant optimism. The Hungarian forint (HUF) experienced a sharp appreciation, reaching levels near 360 against the Euro on the news of the opposition victory (see figure CEE1). This strengthening occurred despite the broader risk aversion in global markets due to the Middle East conflict, suggesting that the "Hungary-specific" risk premium has compressed significantly. We now forecast the HUF to be firmer also in the future, trading at 368 HUF for 1 EUR by the end of this year to stabilise at 365 by the end of 2027 and beyond. 

The central bank (MNB), however, remains cautious. At its March Monetary Council meeting, the bank maintained the base rate at 6.25%. The rationale for this "hawkish hold" was the immediate risk posed by the surge in global energy prices. Although March inflation was recorded at a surprisingly low 1.8%, the bank anticipates a significant pass-through effect from rising oil and gas costs starting in the second quarter of 2026. We also now expect the next base rate cut by the MNB to come as late as Q4 this year.

Czech Republic: Monetary rigidity and persistent core inflation

The Czech National Bank (CNB) has adopted a stance of strategic patience, maintaining its two-week repo rate at 3.5% in March. All seven board members voted in favour of the hold, reflecting a consensus that while headline inflation has approached the 2% target, the underlying pressures remain potent.

A primary concern for the CNB is the continued tightness of the Czech labour market. Wages rose by 7.4% year-on-year in Q4 2025, which, when coupled with low unemployment (3.2% in February), continues to fuel services inflation. Services inflation stood at 4.7% in March 2026 (see figure CEE2), suggesting that core price growth is structurally decoupled from the temporary disinflation observed in goods and energy earlier in the year.

The CNB declares determination to maintain a "relatively tight" monetary policy compared to historical norms to ensure long-term stability. The bank has indicated that future rate settings will depend on the evolution of the Koruna and the fiscal impact of government measures, such as recent efforts to lower electricity bills for households.

Slovakia: Industrial challenges and strategic energy disputes

Slovakia’s macroeconomic landscape in early 2026 is characterised by a paradox: a returning trade surplus amidst a widening industrial contraction. Industrial production in February 2026 fell by 2.9% year-on-year, primarily dragged down by the manufacture of transport equipment, which experienced a 7.3% decline. As the automotive sector represents 33% of total Slovak industrial output, this downturn has significant implications for the country's overall growth trajectory, which is now projected at a modest 1.3% for the full year.

The Slovak trade balance achieved a surplus of EUR 321.6 million in February 2026, following two months of deficits. However, this improvement was driven by a reduction in the value of imports (-2.5%) rather than robust export performance (-1.3%). The decline in imports was most pronounced in the mineral fuels category, reflecting both lower domestic demand and the ongoing complexities of diversifying away from Russian energy sources.

Against this backdrop, Prime Minister Robert Fico has reiterated Slovakia’s plan to challenge the EU’s Russian gas ban before the European Court of Justice. The government argues that the regulation’s adoption by qualified majority undermines treaty based requirements for unanimity in sensitive energy and foreign policy decisions and poses risks to security of supply.

In parallel, Bratislava introduced temporary differentiated diesel pricing for foreign registered vehicles to shield domestic consumers from fuel price spikes amid supply pressures. The European Commission has indicated that this measure may breach single market rules and could trigger infringement proceedings, adding another layer of tension to Slovakia’s relations with EU institutions.

Bulgaria: Eurozone membership and a shifting policy compass

Following its historic entry into the Eurozone on January 1, 2026, Bulgaria has maintained a focus on price stability and labor market resilience. The Bulgarian unemployment rate stood at a record low of 3.2% in February 2026, positioning the country alongside Poland and Czechia as the best performers in the EU. However, the transition has been accompanied by persistent inflationary pressures that remain above the Eurozone average.

Bulgarian annual inflation, measured by the CPI, reached 4.1% in March 2026, up from 3.3% in February. This acceleration was driven by a 7.2% surge in transport costs and increases in information and communication services. We have raised our forecast of the annual headline HICP inflation in Bulgaria to 4.1 % this year and 3.2% next year.

Industrial production in Bulgaria remains under significant pressure, declining by 8.1 % year-on-year in February 2026. This was largely due to a staggering 36.1% drop in the electricity, gas, steam, and air conditioning supply sector. In contrast, the manufacturing industry showed signs of recovery, growing by 0.4% annually and 3.8% month-on-month, led by basic metals and pharmaceuticals.

The Bulgarian political landscape also changed dramatically this month. Since 2021, Bulgaria experienced persistent political instability, cycling through seven prime ministers and eight parliamentary elections. This pattern was interrupted in Sunday’s snap election, when the Progressive Bulgaria movement, led by former President Rumen Radev, secured an outright parliamentary majority (see figure CEE3).

Radev focused his campaign on dismantling what he portrays as an entrenched “mafia state”. Public dissatisfaction with governance remains acute, reflected in Bulgaria’s ranking of 84th in Transparency International’s latest Corruption Perceptions Index, among the weakest in the EU.

Radev’s victory also has important foreign policy implications. He has consistently taken a skeptical stance toward military support for Ukraine, questioned the effectiveness of EU sanctions, and called for a more pragmatic relationship with Moscow. His approach to energy policy, including openness to continued imports of Russian oil, places Bulgaria among the more Russia tolerant capitals within the EU at a time when the bloc is seeking deeper strategic decoupling.

Poland, RRF driven growth amid inflation and fiscal constraints

Poland’s macroeconomic trajectory shifted as annual inflation rebounded to an eight-month high of 3.0% in March 2026, driven by an energy shock from the Iran conflict. In response, the NBP held the reference rate at 3.75% in April, pivoting to a cautious "wait-and-see" stance. While February industrial output (up 1.5%) confirmed resilient activity, the newly unveiled "Buy Polish" framework signaled a push for economic sovereignty in state procurement.

Regionally, Poland leads with 2026 GDP forecasts (we expect a 3.4% increase) amid peak RRF fund absorption. At the same time, though, the country faces broader CEE inflationary pressures (our prediction of HICP inflation is 3.0% for 2026 and 2.7% for 2027). Moreover, the Polish economy belongs to the group of countries with the largest fiscal deficits in the EU (7.2 % of GDP in 2025). Under the Excessive Deficit Procedure since 2024, the government is tasked with correction by 2028. However, the 2026 draft budget projects only a slight narrowing to 6.5% as record defense spending (4.8% of GDP) and structural social transfers persist. We project Polish public debt to climb ten percentage points by 2027 from 60% estimated at the end of 2025.

Box CEE - House prices in Central and Eastern Europe accelerate as supply lags

In early April, Eurostat published the house price data for Q4 2025. In Hungary (+4.2% qoq) and Slovakia (+3.1%) price dynamics remained strong, while the effect of the euro introduction on house prices in Bulgaria (+0.3%) now appears to be easing. Looking at average annual growth for the full year, Central and Eastern European countries recorded double digit price increases. Based on Eurostat data, house prices grew the fastest in Hungary (+18.3%) last year, followed by Bulgaria (+14.6%), Slovakia (+12.4%) and the Czech Republic (+10.4%).

Estimated overvaluation in the housing markets of the countries mentioned has increased according to the various ECB estimation methods (see figure CEE4). These data are available up to the third quarter of 2025. Our own models suggest a further increase in overvaluation in the fourth quarter, mainly in Hungary and Slovakia. The more moderate price growth recorded in Bulgaria in Q4 is likely to slightly dampen the overvaluation indicated in the ECB statistics. Given supply issues in residential real estate markets (which are not or inadequately captured by the valuation estimates), higher overvaluation metrics should not be mechanically interpreted as bubble signals.

Prices are rising, while supply is not. Whether one looks at the number of building permits, gross fixed capital formation in dwellings, or construction volumes, figures in many cases were weak or declining in 2025. If housing prices are decomposed into supply and demand components¹, it becomes evident that supply constraints accounted for the bulk of price growth in 2025. This is illustrated in figure CEE5 for Slovakia. A similar observation applies to Hungary and the Czech Republic, although current price growth in the Czech Republic largely reflects earlier supply shocks that are still feeding through, as no new supply shocks were recorded in recent quarters. In the case of Bulgaria, price dynamics are primarily driven by stronger demand.

The supply problem, namely that demand for housing exceeds available supply, is further underscored by the faster increase in prices of existing homes, especially in Slovakia and Hungary. Possible explanations include difficulties in obtaining building permits and persistent labour shortages reported by construction firms for several years, a problem that has not eased across Central and Eastern Europe. Shortages of construction materials declined in 2025, but the crisis involving Iran could put supply pressures back on the agenda.

What do supply shocks imply for overvaluation statistics? Many valuation methods focus primarily on the demand side of the market, for instance on housing affordability given available household income. Higher overvaluation metrics capture an affordability problem rather than a bubble driven by excessive demand or overly optimistic expectations. In our scenario, we expect at most moderate house price growth rather than a decline in nominal prices. For 2026, we forecast price growth of 7.7% in the Czech Republic, 7.5% in Slovakia and 9.0% in both Bulgaria and Hungary. These remain solid figures that are nevertheless significantly lower than those realised in 2025. In the case of Hungary, positive demand shocks are expected in connection with government subsidies for first time buyers, in particular the Home Start mortgage programme introduced in the autumn of 2025. Overall, housing market risks in Central and Eastern Europe remain concentrated in affordability pressures rather than in abrupt price correction dynamics.

Footnote: 

1/ Using the identification strategy explained in Box 3 from Battistini, Niccolò & Le Roux, Julien & Roma, Moreno & Vourdas, John, 2018. "The state of the housing market in the euro area," Economic Bulletin Articles, European Central Bank, vol. 7.