Hungarian central bank chief repeats criticisms of Orban’s economic policy

Hungarian National Bank (MNB) Governor Gyorgy Matolcsy has once again harshly criticised Hungarian Prime Minister Viktor Orban’s economic policy, business website Portfolio reported. 

Speaking about the MNB’s 2021 results in Parliament on Wednesday 9 March, Matolcsy said if inflation is due to external causes, then the central bank should not react so strongly. 

Matolcsy said Hungary’s 3.9% budget deficit target for this year will stimulate inflation, and asked the government to help the central bank in the fight against this. According to him, interest expenses will increase to 4.6% of GDP next year, which the central bank governor called “a trap”.

According to Matolcsy, Hungary’s food price caps worsened the situation, adding 3-4 percentage points to inflation, while the country’s productivity of the food industry is the second lowest in the EU.  External capital can be involved, with the “appropriate high technology”, but catching up cannot be built on that, Matolcsy referred to Hungary’s planned battery factories.

The following day, Orban responded that “it is not abnormal that there is a dispute between the government and the central bank” but added that the fact that there had been no major economic policy debates since 2012 demonstrates the stability of Hungarian economic policy. Orban meanwhile announced a new industrial policy and said Hungary needs 500,000 more working people.

Analysts back Matolcsy’s comments

Portfolio asked analysts whether Matolcsy’s comments were justified. CIB Bank senior analyst Mariann Trippon told the Hungarian website that Matolcsy’s words are worth paying attention to in the current state of the economy.

“Most of what the MNB governor said about the current state of the economy was legitimate, for example, the fact that keeping the price caps also added to the increase in inflation. However, what is most important is that there should not be such a big difference in principle between the government’s fiscal policy and the MNB’s monetary policy, because after a while this will stimulate processes such as the one in which the Hungarian economy is currently.”

Public debates spook investors – ING analyst

ING senior analyst Peter Virovacz agreed with Trippon, saying the most important thing now is that the debate is not taking place behind closed doors, but in front of the general public – and it would be better if the government and the MNB coordinated fiscal and monetary policy as soon as possible.

“There is nothing wrong with having different opinions… the problem is that this discussion does not take place behind closed doors, but in front of the eyes of investors and credit rating agencies. This creates mistrust and, as we can see, can scare away investors very quickly. Which then manifests itself in the weakening of the forint or the increase in the cost of public debt financing,” Virovacz said.

“Based on the studies we have seen so far, battery factories require three factors: water, energy and labour. All three are resources that face serious limitations in Hungary in the short- and medium-term. Due to the demographic deficit, there is no longer a huge labour reserve, it has to be imported.

“In order to satisfy the increased energy demand, either imports or domestic production are needed, but the construction of the latter also entails a significant demand for imports, and it is doubtful how sustainable and independent all this will be.

“Climate change makes it increasingly risky to start up industries that use the country’s water balance to an extreme degree. Economic growth from capital can have a lasting surplus if it is combined with technological progress and higher added value,” Virovacz added.

MNB’s words should have been heeded earlier – Madar

Portfolio’s in-house macro analyst Istvan Madar said the MNB has long “been trying to warn about the economic anomalies caused by price caps, because it is true that they caused a direct price drop, while other products became more expensive in the meantime.

“After the price cap is removed, prices will not creep back immediately everywhere, and this will be caused precisely by the fact that the price caps have been maintained for so long. Analysts are also afraid that maintaining price caps will have an inflationary effect, and they are certainly right,” Madar said.