Hungary's Government Pressure Central Bank Tackle Inflation, Stirring Controversy

The rift between the Hungarian government and the central bank seems to be depening as both sides accuse the other of failing to combat soarting inflation. In the latest development, a top ranking politician said Hungary's central bank has struggled to control price rises, prompting the government to step in with its own measures.

Hungary has grappled with surging inflation, which peaked at over 25% annually in the first quarter of the year and still stands as the highest in the European Union at 16.4% as of August. However, economists anticipate a gradual decline to approximately 7% by December. The consequences of high inflation have been profound, with the nation's economy facing the prospect of a yearlong recession in 2023.
The OECD forecast this week that the nation’s economy was likely to contract this year before rebounding in 2024.

Cannot cope
Prime Minister Orbán criticized the National Bank of Hungary (NBH) at the beginning of the week, asserting that "energy prices and Brussels sanctions have pushed inflation in Hungary to a level that the central bank cannot cope with." He proclaimed that the government had assumed the responsibility of combating inflation.
Orbán's chief of staff, Gergely Gulyás reiterated this stance, emphasizing the government's efforts to swiftly bring down inflation. When pressed about the possibility of central bank Governor György Matolcsy resigning, Gulyás dismissed the notion, suggesting that average inflation could decelerate to a range of 3.5% to 6% in the coming year.
The central bank declined to comment on the matter, but Deputy Governor Barnabás Virág stated on Monday that the central bank and the government were in alignment regarding the objective of reducing inflation.

Eroding confidence
Analysts, such as Péter Virovácz at ING Bank in Budapest, have expressed concerns about the public dispute between the government and the NBH, suggesting that it may undermine investor confidence in Hungary. Virovácz remarked, "In this challenging situation, playing the blame game only worsens investors' impression about Hungary. Even if it is just a simple political narrative, this can erode investor confidence, increasing the risk premium on Hungarian assets."
Notably, Matolcsy, previously referred to as "his right hand" by Orbán, had vocally criticized the government's imposition of price caps, contending that they had contributed to inflation by as much as 3 to 4 percentage points. According to Matolcsy, retailers had increased the prices of other goods to offset lost profits due to the caps.
In response to the economic challenges posed by inflation, Hungary's central bank recently slashed its one-day deposit rate by 100 basis points to 13%, effectively reversing the emergency rate hikes initiated in October of the previous year. The bank has committed to exercising caution in its future policy decisions as it continues with its easing cycle.
The standoff between Hungary's government and its central bank has intensified the debate surrounding the roles and responsibilities of each entity in managing the nation's economic challenges.