Hungary's sticky inflation exposes rift between government and central bank

By Gergely Szakacs

BUDAPEST (Reuters) - Hungary's central bank doubled down on a "very disciplined and tight" monetary policy and its governor called on Prime Minister Viktor Orban's government to aid the inflation fight after February data on Wednesday showed inflation still exceeding 25%.

A policy clash between Orban, who has ruled Hungary since 2010, and Governor Gyorgy Matolcsy, his former economy minister, came to the fore on Wednesday, with Matolcsy voicing new criticism of Orban's handling of the inflation crisis.

Warning that Hungary faced risks from rising debt servicing costs and slower convergence towards western European income levels, Matolcsy said Orban had ignored several pleas from the bank in the past years for reforms to boost competitiveness, which he called a missed opportunity.

"In the past decade, Hungary had clear objectives. To create a million new jobs. Now it has none," Matolcsy told parliament.

"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 said.

Orban's press chief did not immediately respond to an emailed request for comment.

Hungarian inflation slowed for the first time since mid-2021 in February, although only by a touch as the headline rate stayed above 25%, giving the central bank no reason to relax its policy.

The bank left interest rates unchanged last week, as expected, and said it would tighten liquidity conditions further, defying government pressure to cut borrowing costs amid a sharp economic slowdown.

"Is the central bank governor offended? Is he frustrated? Has he fallen out with the prime minister? No. God forbid. There is a disagreement in principle between the government and the central bank," Matolcsy told parliament.

"The National Bank of Hungary must fight against inflation and we ask the government's help in this effort," Matolcsy said.

'SLAMMING THE BREAKS AND PUSHING ACCELERATOR'

The European Commission projects Hungary's headline inflation rate at 16.4% this year, the highest in the European Union, boosted by food prices surging nearly 50% in January and double-digit rises in services and energy prices.

Matolcsy, once dubbed by Orban as his "right hand," said a rift between the central bank and the government emerged in 2021 as inflation started rising, with the bank "slamming on the brakes," while the government "pushed the accelerator".

Matolcsy said all price caps still in place, including those on some basic foods, should have been scrapped as of the start of the year as they have added some 3% to 4% to inflation, with the 2023 budget still compounding inflationary pressures.

Deputy Governor Barnabas Virag later told lawmakers that the bank aimed to wrestle down inflation as fast as possible to a "low range" near its 3% target, adding that tight policy was also needed to preserve financial stability.

Virag said Hungary would have a "tough job" bringing inflation back to single digits by the end of the year.

(Reporting by Gergely Szakacs; Editing by Christina Fincher and Tomasz Janowski)