Economy Minister Nagy is proposing to consider raising the medium-term inflation target

HUNGARY - In Brief 12 Jun 2023 by Istvan Racz

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Economy Minister Nagy, formerly MNB vice governor, published an article in today's daily newspaper Magyar Nemzet, raising the idea to set a higher medium-term inflation target than the MNB's current 3%, with a 2-4% tolerance band. Explaining his idea, he referred to upcoming structural changes on account of green policies, demography, energy, the Russia-Ukraine war, bottlenecks in the existing system of economic globalisation, etc, all of which may imply lots of extra costs for a long period. He said these factors may lead to the result that inflation cannot be reasonably reduced to 2-4% even in longer term. In this case, it may be more reasonable to set a higher inflation target, which could lead to lower real interest rates and higher economic growth. This has nothing to do with the government's short-term inflation target of 10% by end-2023. But even so, or may be exactly because of that circumstance, some eyebrows may be raised at hearing this piece of news. Yes, Mr. Nagy is the minister responsible for economic growth, short and long-term alike. But why is he concerned about the 3% inflation target when inflation is actually higher than 20%? And when exactly could anyone detect anything more than a loose link between actual inflation's relative position to the exact level of the inflation target in Hungary? (You do not necessarily suffer from amnesia if you do not remember many such cases in the past, in our view.) So, just very briefly, here are some hints that we can offer to the reader as a potential basis for a loosely defined working hypothesis on the matter: - Current economic growth (GDP) is negative, and short-term prospects are not very spectacular either...