Jan 26, 2023
Hungary’s Economy Minister Prods Central Bank to Start Rate Cuts
(Bloomberg) -- Hungary’s economy minister criticized the central bank for waiting to lower the European Union’s highest borrowing costs, saying hesitation is unwarranted because investors already expect interest rate cuts.
Reopening a rift between the cabinet and monetary policy makers, Economy Minister Marton Nagy told the Mandiner weekly that if the central bank properly telegraphed its policy actions and outlook, obstacles to “the cautious start of interest rate cuts” would fall away.
Nagy’s comments came after Deputy Governor Barnabas Virag said Tuesday a “trend-like” improvement was needed in Hungary’s risk profile before the central bank could cut the key interest rate. Rate setters hiked it to 18% in October to shore up the plunging forint.
But the economy minister said traders were already pricing in cuts and expect rates to fall to single digits by the year-end, so loosening now wouldn’t hit the currency.
“If the central bank follows the market, then the exchange rate won’t react since the steps are already priced in,” Nagy said in an interview with Mandiner published Thursday.
The central bank has sought to dampen expectations of a quick reversal, citing the EU’s fastest inflation at close to 25%, as well as the effective freeze on about $30 billion of EU funding over over rule-of-law concerns under Prime Minister Viktor Orban. Fitch Ratings cut Hungary’s credit outlook on its second-lowest investment grade to negative on Friday on economic risks.
The dispute between Orban’s administration and the central bank goes both ways. Governor Gyorgy Matolcsy railed against the cabinet last month for driving the economy into a “state of near crisis,” including by introducing a range of price caps that ended up fueling inflation instead of reining it in.
Nagy, a former deputy of Matolcsy, rejected the argument and said price caps could be removed once disinflation gathered pace.
Consumer price growth may peak at “a little over 25%” in January before starting to retreat from February and then falling “drastically” over the course of the year, Nagy said. He added that Hungary’s economy would also grow an annual 1.5% in 2023, while the budget deficit would narrow and government debt would decline.
“The central bank will decide what ‘trend-like’ means,” Nagy said.
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