Hungary’s Chief Banker Warns of  “Near-Critical”  Economic Situation

Hungary is teetering on the brink of an economic “crisis” and it is one of the “most economically vulnerable” countries in the world, the central bank governor warned. Adopting an unusually critical tone, György Matolcsy blasted the policy mistakes committed by the government of Prime Minister Viktor Orbán in handling the crisis.

The Governor of the National Bank of Hungary came out criticizing the economic policy of the government at a parliamentary hearing this week and warned that the nation is facing a “near crisis.”

Price caps must go
Matolcsy singled out the price limits introduced by the government on mortgages, fuel and a range of food items that cap the retail cost of these products below market prices. Hungary's inflation could be between 15% and 18% next year, among the highest in the European Union, as a result of the caps. He said fuel price caps are causing 3–4% of inflation. “All price caps should be phased out immediately,” Matolcsy told Hungarian MPs present at the hearing. He said the price caps had prompted retailers to raise the prices of other, non-capped-price products, adding 3% to 4% to inflation. He singled out that cap on fuel prices, which has prompted people to consume more despite the energy crisis. He called the situation "absurd". The latest retail sales data showed that fuel sales in Hungary jumped 19.7% in annual terms in October. Zsolt Hernádi, head of national oil company MOL, has long been a critic of the price cap on petrol products, saying the situation was unsustainable.
One day after Matolcsy’s testimony in front of the parliamentary committee, the government announced it was abolishing the petrol price caps with immediate effect in response to nationwide fuel shortages that led to panic buying. Hungarian media published images of hundred-meter-long queues at filling stations nationwide while a large part of pumps were out of order at several stations in Budapest. The government blamed EU oil sanctions over Russia's invasion of Ukraine for the fuel problems. "What we feared came true: the oil sanction that entered into force on Monday caused perceptible disturbances in Hungary's fuel supply," Orbán's chief of staff, Gergely Gulyás told reporters.

Number one enemy
Matolcsy sharply criticized the Cabinet’s expansionary fiscal policy in 2021 when the government went on a spending spree ahead of general elections. The governor noted that lavish government spending significantly increased inflationary pressures in the economy. "We, the NBH, have warned that the government's crisis management strategy of the past half year has been wrong," Matolcsy said. He added that annual inflation was now largely driven by a surge in food prices, which was due to low productivity and monopolies in the Hungarian food sector and a high share of imports.
Inflation in Hungary reached 22.5% year-on-year in November, marking a new twenty-year high, with food and energy remaining the items with the biggest surges. Analysts warned that the recent removal of the fuel price cap could accelerate inflation in the coming months. The central bank forecast in September average inflation of 13.5%-14.5% for this year.
Matolcsy said inflation was the "number one enemy," adding that the central bank would fight it with all possible means. The National Bank of Hungary left its base rate unchanged at 13% in late November and pledged to maintain tight monetary conditions for a "prolonged period", with inflation only set to decrease more significantly from mid-2023.
“We have to face the fact that if Hungary does not change its economic policy, if it does not implement a two-thirds turnaround in economic policy, it will lose this decade, and stagnation and stagflation will follow. This can still be reversed, but it will be too late next year,” the central bank chief warned.