MNB Ready for More Hawkish Stance as Matolcsy Starts 2nd Term


MTI/Szilárd Koszticsák

György Matolcsy, governor of the National Bank of Hungary (MNB), started his second six-year term early in March. Supplementing the government’s strategy, unorthodox policy is expected to remain in place, although now it will be deployed to tackle fears of rising inflation, slowing economic growth and to fuel Hungary’s competitiveness.

György Matolcsy (left) is sworn in for his second term as Governor of the National Bank of Hungary by Hungary’s President János Áder (right) on March 1 at the Sándor Palace. In the background, from right to left, are: Prime Minister Viktor Orbán; Mária Ádám Haszonicsné, Director General of the Presidential Office of the Republic of Hungary; János Latorcai, KDNP MP and Deputy Speaker of the Hungarian Parliament; and Márton Nagy, Deputy Governor of the MNB.

The former Minister of Finance, once described by Prime Minister Viktor Orbán as his “right hand”, Matolcsy was appointed for a second (and final) term based on Orbán’s proposal. During his first term, the chief architect of the Hungarian government’s unorthodox economic-recovery program introduced a wide array of growth-supporting measures and the central bank base rate has been brought to a historic low, to 0.9% from 5.25%.

Before taking his position for the first time, Matolcsy (who gives few interviews and declined our invitation to do so for this piece) pledged to use more creative monetary measures than his predecessors, following the footsteps of the U.S. Federal Reserve Board. The Fed and the European Central Bank pioneered the use of “quantitative easing” by buying government bonds in secondary markets. This unconventional monetary-policy tool is still used by central banks to inject money into the economy through buying financial assets from retail banks or other agents in the economy.

Aiming to boost output without endangering financial stability or igniting inflation, Matolcsy oversaw a reversal in corporate lending trends supported by the MNB’s Funding for Growth Scheme. He also helped coordinate the conversion of retail foreign currency mortgages into forints, reducing household debt by some HUF 1 trillion and thus weeding out one of the riskiest factors of the Hungarian economy.

These steps cleared the space for cutting the key policy rate further, since the threat of a weakening currency was no longer a menace for household foreign currency loans. But amid the recent Europe-wide turn for a more hawkish tone at central banks, the Hungarian rate setters also started to talk of a more cautious approach in January.  


András Simor, the former central bank head, now serves as senior vice president, chief financial officer and chief operating officer at the European Bank for Reconstruction and Development. During his term as central bank president between 2007 and 2013 he and his fellow monetary policy councilors kept the key policy rate relatively high, citing international economic turmoil and Hungary’s high exposure to it.

The key rate stood at 7.75% when Simor took the helm. The MNB was forced to raise it to a record-high of 11.5% when the economic crisis hit the country in 2008. When Orbán returned to power in 2010, the two men quickly locked horns over fiscal, monetary and economic policy, and the independence of the central bank. The Prime Minister expected Simor to quickly cut the interest rates, but the governor considered that reckless given the conditions at the time.  

Simor criticized the government for its reliance on windfall taxes that often targeted foreign-owned multinationals and other ad-hoc fiscal steps, saying “the uncertain, unpredictable regulatory environment” was the biggest problem facing Hungary’s economy. Nevertheless, Orbán got his way eventually and by the end of Simor’s term, the key rate had been cut to 5.25%, as the PM gradually replaced monetary council members with pro-government appointees as their mandates came to an end.

More Hawkish

Although most analysts do not yet expect the central bank to start monetary-policy tightening this year, according to a poll by Reuters, rate setters’ recent comments do indicate that the bank is eyeing inflation as it maneuvers towards a more hawkish stance.

“Core inflation excluding indirect tax effects is likely to continue to rise in the coming quarters,” the central bank said in its latest post-rate setting decision statement in February. “The Monetary Council closely monitors incoming macroeconomic data and will decide to adjust monetary conditions depending on their outcome.”

While the MNB has maintained its unconventional tool-set and kept the key policy rate at the all-time low of 0.9%, inflation has been on the rise; the headline figure rose to 3.1% in February, although this is still in line with the central bank’s medium-term goal.

In January, Deputy Governor Márton Nagy said if core inflation excluding the effect of indirect taxes, which is a favored indicator for long-term inflation, exceeded 3% in the first three months of the year, that would be a strong signal that tightening measures would be necessary.

Supporting Competitiveness

Although his name is not included among the authors, the central bank’s latest plan to boost competitiveness can still be linked to Matolcsy.

The 234-page Competitiveness Package includes a wide scale of recommended steps for the government to maintain economic growth and achieve 70-80% of the development level of that of Austria by 2030.

The 12 key areas, which are usually outside a central bank’s scope, include improving the productivity of Hungarian-owned small- and medium-sized enterprises, increasing their competitiveness in foreign markets, improving the productivity of the banking sector, digitalization of the administration, improving health, better access to knowledge and supporting for establishing families and boosting childbirth figures.

The package, which includes 330 key points, notes the convergence of the Hungarian economy may only be successfully achieved if it maintains a growth surplus of 2 percentage points annually compared to more developed countries. Hungary’s gross domestic output grew by 4.9% on the year in 2018, but analysts have warned a global slowdown could affect Hungary’s outlook, too.

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