CEE: Government deficit in the region

On the radar

• Hungarian central bank cut policy rate to 5.75% as was expected
• Producer prices in Slovenia 2.4% y/y in June
• Unemployment rate in Croatia in June eased to 3.3% and real wage growth slowed to 2.6% y/y
• Today, Poland releases retail sales data, while Slovenia shows real wage growth in June

Economic developments

As Eurostat released data on government deficit and public debt in the first quarter, we look at these developments in the region today. CEE fiscal performance remains unbalanced across the region. We take 4Q moving average as the basis of comparison and only Czechia and Slovenia remained comfortably within the Maastricht deficit ceiling of 3% of GDP in 1Q26, while Croatia moved slightly beyond the threshold. In Croatia, fiscal buffers have thinned, with geopolitical realities adding a further burden. We see risks to our 3% of GDP budget deficit call as skewed to the downside. Further, fiscal deficits remained elevated in Slovakia and Hungary, at around 4.4% and 5.2% of GDP, respectively. In Hungary, pre-election spending is expected to leave a significant mark on this year’s fiscal deficit, which is likely to rise toward 7% of GDP according to recent information from the Ministry of Finance in Hungary. Poland continued to record a deficit close to 7%, while Romania, despite a marked improvement from around 9% to 6.5% of GDP, remained among the region’s weakest fiscal performers. However, year-to-date cash deficit figures suggest that Romania may be on track to meet its fiscal target close to 6% of GDP. Yet, the greater challenge will be the design and approval of measures for next year, given the political fragility and the lack of a stable parliamentary majority.

Market movements

Hungarian central bank cut policy rate to 5.75% and it seems it will continue with monetary easing at the next meeting. The stability of the foreign exchange market received special emphasis in the statement. The central bank governor specified a narrow band for EURHU between 355 and 360. Further, the governor Varga projected a substantial improvement in the interest rate path, but the September forecast round will be critical in terms of the extent. For now, we maintain our 5.00 percent expectation for the year-end interest rate level with upside risks, both from the perspective of the effects of the Middle East conflict and the budget outlook. Czechia’s Governor Michl, in an interview for Financial Times, pushed back against political calls for faster rate cuts and rapid euro adoption, arguing both would jeopardize price stability. CEE currencies remain weaker against the euro this week as Brent price of oil increased toward USD 92 per barrel. The US and Iran continue to exchange strikes, and President Trump minimized the prospects of immediate talks with Iran.

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