Hungary’s Central Bank Hikes Rates as Governor Lambastes Economic Policy

The National Bank of Hungary delivered its third interest rate hike in as many months as monetary policy makers seek to slow the rate of price increases. Meanwhile central bank Governor György Matolcsy berated the government’s economic policy and called for a turnaround in competitiveness.

The Monetary Policy Council of the National Bank of Hungary (NBH) raised the benchmark interest rate by 30 basis points to 1.5% this week, tightening monetary conditions for the third month in a row to rein in inflation. The central bank also raised the rate on collateralized loans and the overnight deposit rate to 2.45% and 0.55%, respectively. The NBH, which was the first European Union central bank to launch a tightening cycle in June, raised its key rate again in July.

Inflation above target
Hungarian consumer prices climbed by an annual 4.6% in July. Even though headline inflation slowed from 5.3% in June, it remained well above the central bank's 2% to 4% mid-term target range.
After the rate meeting, the central bank said in a statement that it would press ahead with further tightening to curb inflation while announcing a tapering of its government bond purchase program. "The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target in a sustainable manner and inflation risks become evenly balanced on the horizon of monetary policy," according to the statement.
The speed of further tightening will be very much dependent on the September Inflation Report, economists at ING Bank in Budapest said. “The market today seems to read that the pace of tightening will slow down – perhaps to 20bp or less increments,” according to ING. Their comments highlighted that the central bank’s ongoing asset purchasing program involving the weekly purchase of HUF60 billion of government securities seemed at odds with a tightening cycle and the NBH addressed that by announcing that weekly purchases would be cut to HUF50 billion.
The market expects the benchmark rate to rise to 2.4% by the end of next year and 2.7% by the end of 2023.

Central bank criticism
As central bankers were gearing up to deliver a new round of rate hikes, NBH Governor György Matolcsy came forward with harsh criticism of the government’s economic policy. In an article published in a daily newspaper, the governor argued that the government of Prime Minister Viktor Orbán missed scores of opportunities in the past decade due to poor policy decisions. Matolcsy stressed that the “institutional weaknesses of economic policy” were to blame for Hungary’s “mediocre” performance in the region, adding that the government had not taken “the best decision” but opted instead for “the path of least resistance” when it put a “tried and tested” finance ministry in an economic policy role. The governor added that EU development funds were not used wisely to sufficiently promote growth. Matolcsy also criticized the government’s housing policy. He pointed out that after converting Swiss franc loans to forint in 2015, “an average of 30-40 thousand new apartments could have been built after 2016, which means a total difference of 60 thousand apartments by the end of 2020, compared to an average of 20 thousand which were actually built. This would have brought an average annual GDP growth of 0.5 percent and additional budget revenues of HUF 200 billion, increasing our economic development by up to two percentage points by the end of the period.”

Not the first time
Criticism of the government’s economic policy from Matolcsy has become increasingly frequent in recent months. In a separate article published a few days earlier, the governor warned that Hungary will face huge economic burden as long as the country remains a laggard in competitiveness. Matolcsy argued that government should overhaul its economic policymaking at the institutional level to boost competitiveness. He added that a next financial crisis was very likely to materialize, and Hungary needed “to find the key that properly closes the gates to crises.”
Matolcsy stressed that Baltic states, Poland and Romania had managed the crisis better than others, “including us Hungarians” in large part due to the efficacy of government decision making coupled with higher rates of competitiveness. Boosting Hungary’s competitiveness calls for economic policymaking rather than budgetary thinking, the governor noted.