Hungary may need to consider raising its inflation goal, Prime Minister Viktor Orban’s economy minister suggested, in an unusually sharp intervention in central bank policy from an key member of his government.
(Bloomberg) — Hungary may need to consider raising its inflation goal, Prime Minister Viktor Orban’s economy minister suggested, in an unusually sharp intervention in central bank policy from an key member of his government.
Price growth is unlikely to return near the central bank’s 3% goal, so it may be best to tweak the target itself, Economic Development Minister Marton Nagy wrote in an opinion piece for a pro-government daily published Monday.
The comments threaten to undermine the authority of the central bank, which is trying to convince investors that it can rein in the European Union’s highest rate of inflation, and may push Hungary toward an even more unorthodox economic policy mix.
Nagy, a former central bank deputy governor, said global “structural” factors, including energy, demographics and the cost of capital, may be raising price-growth. Increasing the inflation target may make the central bank more credible in such an environment, he said.
“A higher inflation goal may help lower real interest rates, making borrowing more accessible, incentivizing investment and economic expansion,” Nagy said in an op-ed published on Monday in Magyar Nemzet newspaper.
The central bank’s press office declined to comment.
The forint fell as much as 0.4% in early trading on Monday before reversing losses to rise 0.1% to 367.66 per euro by 12:10 p.m. in Budapest, close to a 14-month high. The central bank’s 17% key interest rate, the highest in the EU, has given global investors a cushion of high carry, helping them to escape negative real yields in developed nations and currency losses in other emerging markets.
Hungary’s inflation slowed for a fourth month but remained above an annual 20% in May, by far the highest level in the EU. Both the government and the central bank project single-digit inflation by December.
“For a minister to discuss the inflation target in a country where inflation rate is still at a brutally high level may not be appropriate,” said Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo’s CIB Bank in Budapest. She added that inflation expectations were also “very high” and “unanchored.”
Others said Nagy’s comments shone a light on the global challenge of bringing price-growth back to pre-pandemic inflation levels, and the likely economic sacrifice needed to achieve that. Hungary’s inflation rate may still average about 9% next year, “materially higher than regional peers,” according to Wood & Co. economist Raffaella Tenconi.
“We think increasing the target is not genuinely desirable at this stage in any country though we have long been arguing that it is unviable for central banks to hit their targets this decade” without slowing progress on other goals such as the transition to a greener economy, Tenconi said.
While government interventions in monetary policy are common in some corners of emerging markets, including Turkey, they are rare in EU member states. Nagy, who has Prime Minister Orban’s ear in crafting unorthodox and interventionist economic policy, has already made waves since his appointment to the post last year.
He unveiled a 13% additional tax on interest earned on bank deposits at the end of May, in an aggressive push to channel funds held at lenders into government bonds. The move came at a time when the EU continues to withhold more than $30 billion in grants and loans from Hungary on graft and rule of law concerns.
Along with tweaks to investment fund rules, the measures triggered an 83 basis-point drop in the 10-year government bond yield this month, to 7.15% on Monday. It prompted protests from lenders and asset managers, who complained that the measures would lead to economic distortions.
Nagy has also presided over a regime of price caps on everything from food to fuel that the government has argued were anti-inflationary, but which the central bank has faulted for actually driving up inflation.
He has introduced a wide range of windfall taxes — which the government is extending into its third year in 2024 to raise revenue — and large-scale subsidized corporate loan programs, undercutting the central bank’s tight monetary policy.
–With assistance from Srinivasan Sivabalan.
(Updates with market reversal in seventh paragraph, economist in 11th.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.