Hungary is targeting an economic growth rate of between 3% and 6% for next year, Prime Minister Viktor Orban announced on Wednesday, as his cabinet is currently dealing with a slower-than-anticipated recovery from last year's recession, driven by high inflation.

Since taking office in 2010, the long-serving nationalist leader has faced challenges in revitalising Hungary's economy after a significant downturn, exacerbated by inflation rates exceeding 25% in Q1 2023, the highest in the European Union.

The National Bank of Hungary, which lowered its base rate by 25 basis points to 6.5% on Tuesday, has also revised its economic growth forecasts. It now projects growth to be between 1% and 1.8% for this year, and between 2.7% and 3.7% for next year, both significantly lower than its earlier estimates, Reuters reports.

“We need to lift economic growth into the 3% to 6% range. We can enter this range already next year, stay there in 2026 and target the high end of the band thereafter,” Orban stated.

Furthermore, the Prime Minister said that Hungary should maintain a disciplined fiscal policy while reiterating his previous commitment to double tax benefits for families and initiate a significant capital injection program for small businesses in 2025. 

Since the COVID-19 pandemic, Hungary's budget deficit has averaged nearly 7% of GDP. Ratings agency Moody's projects the deficit to be 5.5% of GDP this year, despite recent government efforts to reduce the shortfall.

Earlier this month, Orban announced that a new ministry would oversee the economy and state finances as he prepares to nominate a new central bank governor to replace former ally Gyorgy Matolcsy. 

Finance Minister Mihaly Varga is widely expected to succeed Matolcsy early next year, while Economy Minister Marton Nagy, a former central banker, may take charge of public finances in the newly merged ministry.

Zoltan Arokszallasi, an economist at Hungary's MBH Bank, noted that the primary risk for investors arising from the leadership changes could be a possible dovish shift in policy, as Hungary continues to maintain the highest benchmark interest rate in the EU, alongside Romania.

“The question is whether the orientation of monetary policy could be substantially looser next year,” he said.

“A rate cut whose scale could potentially take markets off guard could significantly weaken the Forint, which could have a boomerang effect on inflation.”