Matolcsy Made Case for Price Cap Phaseout in Early December

MNB

György Matolcsy

Photo by MTI/Lajos Soós

National Bank of Hungary (MNB) governor György Matolcsy argued for the phaseout of government-mandated price caps because of their indirect inflationary impact in a presentation delivered to parliament's Economy Committee on December 5, materials from the presentation posted on the central bank website show, according to a report by state news wire MTI.

In the presentation, Matolcsy said price caps on staples and motor fuel added 3-4 percentage points to inflation through indirect channels.

He acknowledged price caps on some staples directly resulted in a 1.2-percentage-point reduction in headline inflation but said the measure drove prices of substitute products higher, adding 1.2 percentage points to the headline figure. Passthrough to catering services contributed 0.2-0.4 percentage points to headline CPI, he added.

He noted that while the price of granulated sugar was capped from February 1, the price of powdered sugar rose 222% since the measure was introduced. The price of pork loin, a substitute for pork leg, which was also capped, climbed 152%, and the price of chicken thigh, a substitute for price-capped chicken breast, increased 167%, the presentation shows.

He also pointed to "serious disruptions" to some vertically integrated production, such as that for dairy products, as companies tried to compensate for revenue loss because of the price caps. 

While the price cap on motor fuels cut headline CPI by 2.5 percentage points, Matolcsy said the spillover effect on "market prices" added 0.4-0.6 percentage points to the headline figure, while persistent higher spreads added 0.6-0.8 percentage points.

He estimated that the impact on exchange rates of a deterioration of the current-account balance due to increased demand added 0.6-0.7 percentage points to headline CPI.

The government scrapped the motor fuel price cap on December 6, amid a surge in demand which caused shortages at refueling stations all over the country.

The price caps on staples, which apply to granulated sugar, BL 55 flour, refined sunflower seed oil, pork leg, chicken breast and back, UHT cow's milk with 2.8% fat content, fresh eggs and potatoes, were extended until April 30, 2023 in a decree issued on December 13.

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