Central Bank Governor's Harsh Critique of Government Policies Deepens Divide

National Bank of Hungary President György Matolcsy's recent scathing criticism of the government's economic policies has further revealed the growing rift between monetary authorities and the ruling administration. In a candid and sharp-tongued address delivered at a conference this week, Matolcsy accused the government of pursuing a reckless economic strategy that has led to a surge in inflation, making Hungary's inflation rate the highest in Europe. Meanwhile, Finance Minister Mihály Varga laid the blame for skyrocketing consumer prices on factors beyond the government's control.

Matolcsy, the head of Hungary's central bank, wasted no time in lambasting the government's economic policies, emphasizing his intent to discuss the harsh realities facing the country. His speech was a stark warning against repeating what he referred to as the "economic disaster" of the past two years, marked by soaring inflation.

Inflationary specter
The central banker did not mince words when criticizing Hungary's worsening inflation, plummeting competitiveness, and declining productivity. He underscored the return of an inflationary specter reminiscent of the 1970s, asserting that the choice between inflation and growth was a false dichotomy. Matolcsy stressed that, historically, inflation has consistently eroded economic growth, emphasizing the need to tackle inflation head-on before fostering growth.
Matolcsy claimed that the central bank had signaled the looming threat of inflation in a timely manner but expressed dismay that the government had failed to join in the bank's efforts to combat it for over a year and a half. He was critical of the government's initial approach of addressing surging consumer prices with a high deficit and a freeze on food prices, likening it to adding fuel to the fire. Matolcsy contended that implementing price caps alone had exacerbated inflation by 3-4%, dubbing it an "adventurous economic policy." Fixing prices artificially had, in his view, caused inflation to seep into all other sectors of the economy.

Emergency Measures
To counteract the severe devaluation of the Hungarian forint, the central bank rolled out an emergency program in October 2022. Matolcsy argued that without this intervention, the prospect of single-digit inflation by the end of 2023 would remain unattainable. Hungary's rapid ascent to the top of the EU's inflation charts had significantly hampered economic growth, as evidenced by four consecutive quarters of declining GDP. Matolcsy also pointed out that inflation, as a burden predominantly borne by the less affluent and retirees, had disproportionately affected these groups.
In conclusion, Matolcsy underscored Hungary's unfavorable risk perception, emphasizing its precarious financial standing compared to other nations.

Agreeing to Disagree
Minister of Finance Mihály Varga, who shared the stage at the conference, acknowledged the government's and central bank's joint efforts to combat inflation. However, he candidly admitted that reaching a consensus was challenging.
Regarding the underlying causes of inflation, Varga attributed it primarily to Hungary's vulnerability to energy price fluctuations. He argued that energy costs had indeed exacerbated inflationary pressures, with rising food prices further contributing to the problem.
As he concluded his presentation, Varga announced that the Ministry of Finance was reevaluating this year's deficit target of 3.9% of GDP. In a less-than-rosy message to the banking sector, he did not rule out the possibility of tax hikes in the near future.