Until 10 years ago, the first man of monetary policy was a broadly independent person without ties (at least formally) to any political party. That changed in 2013 when the outgoing MNB governor, András Simor (appointed by the then-ruling Socialist party in 2007, he had what could best be described as a “problematic” relationship with the ruling Fidesz party, which returned to power in 2010), was replaced by the Minister of National Economy in the Orbán government, György Matolcsy.
A close ally of Viktor Orbán (who once described the minister as his “right hand”), Matolcsy gradually distanced himself from the prime minister and the government he once was part of, openly criticizing the cabinet’s economic and fiscal policy.
Matolcsy’s second mandate will end in March, and, by law, he is prevented from having a third term, but it seems probable Orbán would have blocked such a move anyway by all means possible. Instead, his position will be taken by another member of the Orbán government, Minister of Finance Mihály Varga, among the most loyal politicians to Viktor Orbán.
“I accept the honorable request of the Prime Minister with gratitude,” Varga posted after the nomination was made public.
The MNB published a very detailed Productivity Report in December that, again, was not too supportive of cabinet measures. The report argues that the government’s policy of fueling GDP growth through heavy subsidies for the automotive and electric vehicle battery industries had failed.
The added value generated by these sectors is well behind other services and innovative industries; therefore, subsidies should be channeled towards more efficient production, according to the MNB. High value-added areas include the financial services, sciences and infocommunication, the central bank says.
The MNB sees things differently from the executive branch, not only regarding the recent past but also in its forecasts. While the government expects inflation of 3.2% this year, the MNB considers 4% more realistic, deputy governor Barnabás Virág said in an interview for 24.hu. The official MNB target for inflation is 2-4%. For now, it is not looking too bright; while the average for 2024 was 3.7%, the figure for December was 4.6% year on year, up from 3.7% in November.
While the principal driver for the acceleration of inflation was the increase in food and fuel prices, other changes will probably contribute to the January rate. The government prohibited raising the bank account fees until the end of 2024, which means that, from Jan. 1, banks are free to do so and to charge the new and higher transaction fees imposed by the government.
Moreover, banks are allowed to raise fees with the inflation rate. Not that they are very much in need of doing that. In a report released in December, in nine months, banks reached a profit of HUF 1.419 trillion, representing earnings only from their branches in Hungary. This amount is 25% higher than in 2023, which was itself a record high.
While that is excellent news for banks and their shareholders, families need to handle growing fees related to their bank accounts. According to a survey conducted by CIB Bank, the members of one-third of Hungarian families have accounts at different banks. Their expenses related to bank accounts are generally below HUF 50,000 per year, but in some cases, they can amount to HUF 150,000 or more.
Family members make bank payments to each other, which, combined with having accounts at different banks, can result in high costs. Therefore, it is probably not surprising that 46% of the respondents would migrate to another bank to reduce costs, while one-third indicated that better products or services would make them consider moving to another bank.
The government is now faced with the dilemma of what should be the priority: GDP growth or inflation, and nor should we forget the budget deficit. Speaking in December before his parliamentary economy committee hearing as candidate for the governorship of the MNB, Varga said that he would be committed to reaching the inflation target of 2-4%.
This commitment “is a clear and unambiguous message that helps anchor the expectations of consumers, businesses, and financial market participants,” Varga said. He added that, under his leadership, the MNB would respond decisively to risks threatening the financial transmission system, financial stability and sustainable economic development.
He said he would also strongly emphasize the management discipline of the MNB, ensuring that the central bank operates transparently and professionally. The basis for economic growth in 2025 is rising consumption, expanding retail lending, growing construction order stock, and new manufacturing capacities coming online. He said that monetary policy can best contribute to economic expansion by maintaining persistently low inflation and financial market stability.
Rising consumption may be problematic, though. An Ipsos survey called “What Worries the World 2024” published recently indicates that Hungary is among the countries with the highest percentage of the population, at some 80%, thinking the country is heading in the wrong direction. Only in Germany, South Korea, Peru and France were the population more concerned. Hungarians were equally concerned about the current economic situation: 84% ranked it bad, just 16% good. Only in Japan, South Korea and France were the figures worse.
Hungarians are most worried about the healthcare system, corruption, poverty, inflation and unemployment. Given this, it is hard to believe they will start spending massively in 2025.
While Varga did not mention it, the exchange rate fluctuation is also an issue in the Hungarian economy, raising prices for imported goods and fueling inflation. If we compare now to the period before February 2022, the Hungarian forint has depreciated by 15.6% to the euro, 26.8% to the U.S. dollar, and 14.9% to the Romanian leu. While in January 2010 one euro cost around HUF 270, now the rate is around HUF 410.
Asked if the euro rate could ever return below HUF 300, Zoltán Varga, a senior analyst at Equilor Investment, told index.hu that such an appreciation of the forint would be utterly unrealistic. By the end of this year, Varga expects the euro rate to be around HUF 420.
This article was first published in the Budapest Business Journal print issue of February 7, 2025.
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