Hungary’s central bank governor slams government policy and flags risks to independence

Hungary’s central bank governor slams government policy and flags risks to independence
Hungarian central bank governor Gyorgy Matolcsy accused his former deputy and now Economy Minister Marton Nagy for spearheading attacks on the MNB. / bne IntelliNews
By Tamas Csonka in Budapest March 1, 2024

Hungarian central bank governor Gyorgy Matolcsy slammed the government's economic policy shift in mid-2021 and denounced attempts by cabinet members to curb the central bank’s independence. He accused Minister of National Economy Marton Nagy, the former deputy of MNB between 2017 and 2020, of spearheading these attacks.

Matolcsy, who has a long track record of criticising Viktor Orban's government,  was speaking at an award ceremony organised by the Budapest Stock Exchange on February 29.

According to Hungary’s chief banker, the consumption-driven economic growth model is doomed to fail, and the government needs to return to an investment-oriented approach, while keeping the deficit and external balance contained.

He said Hungary needs to focus on sectors with high added value, those that will become the drivers of the technology-induced transition in the coming decades. He called for restoring fiscal discipline and external balance, growth in competitiveness reforms and productivity.

Matolcsy has been an advocate of a shift in economic policy to move Hungary out of the middle-income trap, with a transition from an extensive to an intensive growth model that requires investments in areas neglected by the cabinet, healthcare and education. The Hungarian National Bank (MNB) in earlier reports claimed that Hungary’s productivity indicators are at two-thirds of the EU average and 40-50% compared to the top five countries in the EU

There is a serious threat that the macroeconomic imbalances, coupled with high inflation, and low productivity in agriculture, and other areas of the economy will cause the Hungarian economy to be on the losing side in this decade, he said earlier.

Matolcsy has also called government measures to tackle inflation a "mass disaster", referring to price caps, which have led to market imbalances.

His criticism underlines the conflict between the central bank, which has its focus on creating price stability, and the government’s pro-growth agenda, with the fallout of budget overspending and higher inflation.

At Thursday’s opening speech at the BSE award ceremony, Matolcsy said that the government started to undermine the MNB’s autonomy starting in mid-2021, both covertly and overtly, and he named Marton Nagy, the former deputy for being behind the attacks.

He also disclosed personnel details of the strained relations with his former subordinate.

"I informed the ministers that it was necessary to terminate his (Marton Nagy's) employment due to professional errors, his managerial approach deemed unacceptable, and his conduct that ran counter to the central bank's interests," he told business leaders.

Nagy was sacked by Matolcsy in May 2020.

Nagy replied later in the day, saying: "Thank God, Matolcsy is no longer my boss."

He refuted the criticism of the central bank governor on the government’s policies, saying the government continues to believe in an investment-based, export-oriented economic model. In the short term, the rebound of consumption is essential for restoring growth, he added.

Government officials and even Orban have voiced criticism of the MNB for failing to effectively fight inflation. Hungary’s leader took credit for bringing down inflation to single-digit levels at the end of 2023 by launching a price comparison platform or introducing mandatory discounts for large foreign retailers.

The question of the central bank's independence came to the forefront earlier this week when the ECB issued an opinion on the draft amendment of the finance ministry. The plan aimed at expanding the scope of authority of the supervisory board of the bank, with a majority of members close to the ruling party, and modifying the authority of the board of directors, saying it would weaken the bank’s independence.

Finance Minister Mihaly Varga in a statement said the government respects the independence of the central bank and its goal is to strengthen its transparency. The ministry is consulting with the ECB, examining the possibility of extending the supervisory authority of the audit committee to activities that do not affect the central bank's fundamental tasks.

On Thursday night, the prime minister’s spokesman stated that the government respects the central bank’s independence.

The forint weakened to a one-year low of 394.5 against the euro in the afternoon after the spat between the government. The central bank's decision to cut the base rate by 100bp at Tuesday’s rate-setting meeting has sent the forint on a slippery slope. The technical signs point to further weakening, as the 390 level was seen as a strong resistance level, and the forint broke out of that tight range after a long period.

Speaking at the BSE gala, Deputy Governor Barnabas Virag stressed that the MNB decided to temporarily accelerate rate cuts, and the pace of easing could slow in the coming months. Virag also called for prudent monetary policy and left mid-year expectations for the base rate at around 6-7% unchanged.