Hungary’s Top Central Banker Warns of Strategic Mistakes in Economic Policy

Hungary’s central bank Governor György Matolcsy slammed the Cabinet’s economic policy making, claiming it “took a wrong turn” ahead of the outbreak of war in neighboring Ukraine. The criticism shows a widening rift within the ruling Fidesz party, which could pose a new risk for the country.

György Matolcsy, governor of the National Bank of Hungary sounded severe criticism aimed at the government, which he claimed made “strategic mistakes” in its economic policy. After years of supporting every measure the government introduced and stating that the central bank’s mandate included supporting the Cabinet’s economic policy, Matolcsy became highly critical of Prime Minister Viktor Orbán’s economic policy in recent times. Last year, the nation’s top banker slammed the government’s decision to introduce mandatory price caps on fuel and basic food staples, saying the measure was misguided and would only fuel inflation.

Reform desert
Speaking in front of Parliament’s Economic Committee earlier this week, Matolcsy said policymaking took a wrong turn and the country was at risk of letting down future generations. “We lost our way in 2021 and regrettably this continued in 2022,” the governor told MPs. According to Matolcsy, a "reform desert" has emerged in Hungary and the cabinet does not have clear goals.
Warning that Hungary faced risks from rising debt servicing costs and slower convergence towards western European income levels, Matolcsy said Orbán had ignored several pleas from the bank in the past years for reforms to boost competitiveness. "In the past decade, Hungary had clear objectives. To create a million new jobs. Now it has none," Matolcsy said.
"When I politely, but tactfully, but still resolutely asked the prime minister to define a measurable objective for the next decade, he told me: if I measure, I lose. He was wrong. If you do not measure, you definitely lose," Matolcsy added.
Matolcsy who was once a close ally of Orbán, now claims there is a “principled opposition” between the government and the central bank. The bank left interest rates unchanged last week and said it would tighten liquidity conditions further, defying government pressure to cut borrowing costs amid a sharp economic slowdown. The bank is committed to a “very disciplined and tight” monetary policy, Matolcsy said, who called on the government to aid the inflation fight after February data showed inflation still exceeding 25%. The European Commission forecast Hungary's headline inflation rate will reach 16.4% this year, the highest in the European Union.
At 13%, Hungary is a record holder in the EU in terms of borrowing costs as well. Deputy central bank governor Barnabás Virág said earlier that the bank would maintain tight monetary conditions for as long as it was necessary in order to bring inflation sustainably close to the bank’s 3% medium-term target. He added that Hungary would have a hard time bringing inflation into single-digit territory by the end of the year, which is the government’s stated plan.
The policy clash between the central bank and the government is viewed by investors as a new risk for the country, as evidenced by the fact that the forint weakened in the wake of Matolcsy’s speech in Parliament.