Petty drama or a major confrontation with serious economic consequences? President of the Hungarian National Bank (MNB) György Matolcsy, Minister for National Economy Márton Nagy, and Minister of Finance Mihály Varga seem once again to be at odds with each other.
Matolcsy
- spoke of the alleged assault on the central bank’s independence, led by his former deputy Márton Nagy, who had been dismissed by Matolcsy due to professional mistakes,
- in response, Nagy remarked that he was glad Matolcsy was no longer his boss,
- while Varga assured Matolcsy of the central bank’s independence by raising the prospect of tougher supervision.
It’s becoming obvious that these three individuals cannot reconcile their markedly different views – answered our questions Péter Róna, professor of economics and former member of the supervisory board of the Hungarian National Bank. Róna was also the joint opposition’s candidate for the 2022 presidential election, while he currently leads right-conservative Jobbik’s list for the EP elections this June. According to Róna, such a confrontational style is destructive, and will prevent any potential solution to the politician’s differences. At one point, Róna had been the secretary of the Bank of England’s governor, and while there had been strong professional disagreements between UK economic policymakers as well, manners had never reached such lows – he recalled.
Data indicating a shrinking economy aren’t favourable ahead of elections
From a national economy perspective, the notion that the key players in economic management represent conflicting approaches is quite unfortunate. On the other hand, it may be also problematic if fiscal and monetary policies point in opposing directions. The government is gearing up for both European Parliament and municipal elections, and therefore wants to prevent any indication of a shrinking economy. However, based on January and February data, a quick rebound doesn’t seem likely.
The government is shovelling every issue right on the central bank’s shoulders: the Hungarian National Bank is responsible for keeping inflation in check, while the lack of growth is also blamed on Matolcsy’s organisation – assessed Róna. The international evaluation of these events is beginning to manifest in the exchange rate of the forint – referred the professor to the recent and lightning-fast hike of the euro to over HUF 394.
Inflation is to be expected, while growth is unlikely: that is called stagflation – he projected the consequence of divergent economic policy. The economy should be placed on a sustainable growth path, but instead, the three economic policymakers are bickering among themselves.
- Mihály Varga has been relegated to the role of an accountant, tasked with fixing the budget deficit, but the policy tools necessary for the task were transferred by the Prime Minister to Márton Nagy.
- The Minister of National Economy makes the decisions, but he is not the one responsible for their consequences – Péter Róna described.
- György Matolcsy is tasked with safeguarding exchange rate stability; meanwhile the government is advocating growth-fuelling measures with the exact opposite effect, pushing for faster interest rate cuts.
In Róna’s view the Prime Minister is a poor manager; he is the one responsible for the flawed distribution of roles. The essence of the conflict is that the right to make decisions belongs to one, while the management of the decisions’ consequences belongs to another. For now, the forint has only weakened slightly, but it’s a warning sign. Should this condition persist, significant currency depreciation could occur, which, due to the relatively high import ratio, would immediately push inflation higher – Róna warned.
Regarding the planned amendment of the central bank law, the Minister of Finance stated that it would serve more transparent and economical management. They are exploring the possibility, in consultation with the European Central Bank (ECB), of extending the supervisory board’s oversight powers to activities not affecting the central bank’s fundamental tasks. Péter Róna believes that the true goal of the amendment is to exert greater pressure on interest rate cuts. By giving the supervisory board insight into the operations of subsidiary companies,
During his service on the Hungarian National Bank’s supervisory board, Róna was of the opinion that the mentioned 260 billion had belonged to those previously holding foreign currency denominated debts, and should be returned to them. (During the 2008-2009 economic crisis, the skyrocketing interest rates of foreign currency – mostly Swiss Franc – denominated debts resulted in one of Hungary’s longest-running and most notorious political questions. The central bank eventually converted these debts into forint-denominated ones in 2015, reaping significant profits in the process.) However, the supervisory board’s investigation into the money being shovelled out from the bank was halted by the government majority, claiming that the supervisory body had no such authority — indicating how times were changing.
Zoltán Árokszállási, chief analyst at Equilor, doesn’t see the economic impact to be this dramatic. “This is just another act in the already known conflict” – he evaluated the events of the award gala to our newspaper. The differences in their viewpoints have long been known, and the debate has been going on publicly for quite some time, which is why the markets weren’t shaken by the strong remarks of the central bank chief.
Verbal conflict already priced in by investors
Strictly in terms of economic impact: Matolcsy argued against the government’s growth-oriented approach, advocating a return to the more balanced economic policy of the 2010s and a shift from consumption-oriented to investment-oriented economic policy. The government did not respond to this suggestion, but immediately denied any intention of encroaching on the central bank’s independence. Mihály Varga justified the amendment of the central bank law only by citing more transparent management, but even the Prime Minister indicated that the independence of the central bank is inviolable – reminded the expert.
The new rounds of the debate may cause fluctuations in the exchange rate of the forint, but Equilor’s chief analyst does not expect serious consequences. Regarding the current exchange rate of the euro, exceeding HUF 390, the movement was rapid, especially considering that in January the price point was still fluctuating below the 380-forint mark. However, considering the 2021 exchange rate of around HUF 350-360 and the significant inflation since then, a rate even higher than the current one would not be too surprising, either – he theorised.
Árokszállási stated that there is undoubtedly “a lot of noise” – referring to the public debate – but he believes that market investors have already factored in this conflict. The central bank communicates that a 6-7 per cent interest rate level could be reached by early summer. This seems realistic, and inflation has also returned to the central bank’s tolerance band of 3 per cent plus/minus one percentage point.
The situation may be different if the international atmosphere worsens, or if the tension between the government and the central bank escalates, perhaps forcing the central bank to cut interest rates faster than what the market considers beneficial. But we are not at this point yet
– said Zoltán Árokszállási. The central bank is proceeding cautiously; in January, most analysts had been expecting a 100 basis point interest rate cut, but – citing deteriorating market sentiment – a decrease of only 75 points was implemented. In February, the spread among different forecasts was greater, and the central bank eventually decided in favour of a 100-point cut. However, according to Equilor’s chief analyst, the central bank is monitoring the market and adjusts its actions accordingly. A soaring HUF exchange rate would also not be in the government’s interests, so he believes the situation will be manageable in the next few months.
