Hungary central bank governor György Matolcsy sings his own praises

January 6, 2015


Hungary’s state media service published an interview with National Bank of Hungary (MNB) governor György Matolcsy on Tuesday.

Matolcsy told MTI that, as a result of the “consolidation and stabilization that took place in Hungary between 2010 and 2014”, Hungary went from being one of the EU member states “on the brink of collapse” to one of its “most promising countries.”  He pointed out that the country’s current account deficit remains at under 3 percent of GDP, that its overall national debt is decreasing, that overall employment levels continue to increase, and that the balance of payments is consistently positive.

“We closed the past year having achieved the EU’s second- or third-best growth rate,” said Matolcsy, adding that the country had finally managed to “execute a monetary turnaround” after having accomplished “a budget turnaround” and a “government spending and economic growth turnaround.”

Matolcsy believes that Hungary is still vulnerable in part due to large state debt and because the EU is still vulnerable, having handled the post-2008 global financial crisis less successfully than the United States. He said the Russian-Ukrainian conflict “increased Hungary’s risks” due to its  “geographical proximity”, as well as the “conflict between Russia and the West” and its “impact on the EU economy and prospects for growth.”

“Apart from that, everybody acknowledges that we are on a good path,” he emphasized with his trademark optimism.

With regard to falling oil prices, Matolcsy pointed out that, while lower oil and hydrocarbon prices “sound like good news … in reality this is not necessarily the case”.  He said that according to some analysis, of the emerging countries of the world Hungary stood to benefit the most from lower oil prices after South Africa.  However, he warned that this could “bring deflation to numerous EU countries and perhaps even to the entire EU.”  Matolcsy emphasized that “neither the EU nor the European Central Bank” is prepared for a “significant, prolonged deflation.”

He said inflation in Hungary is “on an advantageous path”.  “If we exclude the price changes in hydrocarbons then the country is moving on a measured, predictable path of inflation.” The low price of oil could result in annual inflation of just 0-1 percent in 2015.

According to Matolcsy:

After the successful economic policies of the 2010s the central bank executed a monetary turnaround in 2013, made possible by the earlier economic turnaround, and that a later change in the direction of monetary policy helped the government in realizing its economic policy goals.

Hungary’s central bank governor continued:

At first glance it seems as though the central bank only supports the government’s economic policies with its growth credit program, however even more important than this was the fact that the monetary council began decreasing the central rate as recommended by its external members. Since its beginning the Growth Credit Program has improved GDP by nearly 1 percentage point, while the significantly decreased basic interest rate accounted for another 1 percent. Altogether the change in monetary policy was responsible for roughly half of the growth experienced over the last two years.

He said that over the last 24 months the council had decreased the central interest rate to a historical low of 2.1 percent, and in doing so had created “an especially favorable monetary situation for Hungarian economic actors”.

(If Matolcsy’s comments thus far are to be taken with a pinch of salt, then the rest of the interview should be taken with a shot or two of pálinkaed.).

Matolcsy claimed that low interest rates have boosted the economy, stimulated the real estate market and restarted flat construction.  He emphasized that given that one of the main causes of the country’s vulnerability is the high state debt, it is “very important” that “as large a ratio of the debt as possible” be financed with “forint sources”.  He told MTI that in the interest of starting things off in the right direction the central bank initiated the “self-financing program”, which he said resulted in “many hundreds of billions forints being converted from central bank bonds to state bonds”.  In doing so Matolcsy claims MNB strongly supported the market for state paper and contributed to the decrease in yields.

Matolcsy believes that the “accelerated monetary policies” put in place in “spring 2013” brought “predictability and stability to the Hungarian economy”, leading him to boast that “(t)oday everyone is of the opinion that the MNB prevented a collapse in domestic lending by cooperating with the government and supporting its economic policies, and that it is a reliable, credible partner to the central banks of global significance as well as to the EU Central Bank.”

Matolcsy said the MNB monetary turnaround was achieved by employing “non-traditional” monetary solutions in place of earlier orthodox monetary interpretations, such as that of the Fed or the Bank of England.  According to him various foundations created (and generously endowed – ed.) by the central bank serve the purpose of promoting the “new kind of unorthodox solutions” in “domestic economic thinking and especially in domestic economic and financial education.”

Conspicuously absent from the interview was any mention of Hungary’s problematic banking sector or the dramatic weakening of the forint of late. For a more accurate description of the events of the past six years, click here.