Hungary cenbank says relation between Governor and PM remain close

"In the past few days, the international news agency Bloomberg and István Ujhelyi, a Socialist MEP, have published untrue news and erroneous conclusions about Hungary, the National Bank of Hungary and the relationship between the Prime Minister and the Governor of the central bank," the MNB said in a statement.

Last week, Bloomberg reported that Prime Minister Viktor Orbán and György Matolcsy, the head of the central bank, were in open conflict over economic policy. In recent weeks, there have been several articles on the issue, which is not surprising given that Matolcsy has been an outspoken critic of the government.

People familiar with the dispute, who talked with Bloomberg on condition of anonymity, said distrust between the two sides is so intense that all meaningful communication between them has ceased. This new level of dysfunctionality of economic policy is unnerving investors, the news agency said.

György Matolcsy has previously said that a side effect of the turnaround from mid-2021 is that the independence and autonomy of the central bank has been and is under attack, both covertly and overtly. The Governor added that what the government is now planning with the Central Bank Act is a major attack on the independence of the MNB.

Hungary's Ministry of Finance has recently initiated an amendment to the Hungarian Central Bank Act (or Law on the MNB) to amend the scope of the MNB's Board of Directors and to extend the powers of the MNB Supervisory Board, among other things. 

 In a document dated 26 February, in the context of the European Central Bank's consultative task, the ECB proposed some changes and stressed the importance of respecting the independence of the central bank in general. The central bank welcomed the ECB's position, while the Finance Ministry, which proposed the amendments, stressed that the central bank's independence would not be affected.

György Matolcsy also sent a message to Márton Nagy, Minister of Economic Development, in addition to the changes to the Central Bank Act.

Government decisions are a covert, veiled attack on the independence of the central bank. Now what the government is planning to do about the central bank law would be a major attack on central bank independence,

he said.

Subsequently, the MNB published an 11-point list of attacks on the MNB by the government. They drew attention to a series of actions that had already "reduced the independence of monetary policy and weakened its transmission channels".

The detailed material published by the MNB last week criticises the following decisions:

• Deposit interest rate caps
• Interest rate freeze on loans
• Prolonged price caps on motor fuels and basic foodstuffs
• Restrictions on MNB discount bond purchases
• Regulation of the portfolio structure of certain investment funds
• "Voluntary" interest rate ceiling on credits
• The suggestion of replacing the BUBOR as the benchmark rate, adding to uncertainties
• Continuous communication pressure for larger interest rate cuts
• Negative market-influencing communication timed to coincide with interest rate decisions
• Lack of consultations on changes to financial legislation affecting the monetary policy framework
• Launch of debate on inflation target range.

This was the background to the MNB's announcement on Monday morning.

"Contrary to the false rumours, Prime Minister Viktor Orbán and György Matolcsy, Governor of the central bank, have a fair working relationship and, as in previous years, they continue to consult regularly on professional issues," the MNB said.

"The National Bank of Hungary calls on the relevant media and party politicians to refrain from publishing information containing erroneous conclusions and untrue statements in order to preserve confidence in the domestic financial system and to provide objective information to readers", the MNB concluded.

Viktor Orbán has so far been relatively terse on the issue. He issued a statement after Matolcsy's critical words, but before the 11-point list was released. "In the Prime Minister's view, the independence of the central bank is sacrosanct," Bertalan Havasi, the prime minister's press chief, said in response to György Matolcsy's statements.

Some market views suggest that the weakening of the forint seen in recent days is partly related to the acceleration of the pace of interest rate cuts by the MNB and partly to the escalation of the disagreement between the government and the central bank.

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