Sharpening talk between the MNB and the government has a negative impact on the forint

HUNGARY - In Brief 01 Mar 2024 by Istvan Racz

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The forint has weakened by 1-2% in EURHUF terms from its level held immediately before the Monetary Council's latest rate-setting meeting on February 27. This could be traced back to mainly to the acceleration of the monthly pace of rate-cutting, of course. But the MNB made an attempt to counter that negative impact by stressing that this acceleration was only temporary, and that it would be compensated later on, so that they did not expect the end-June base rate to be any lower than their previous expectations. This message was apparently not appreciated by the market, and one reason why must be the apparent sharpening of a long-existing conflict between the government and the central bank. On the latter, economy minister Nagy, Mr. Matolcsy's deputy in the MNB until late May 2020, has had a separate interest rate policy for quite a while, in the form of low-cost credit schemes made accessible to enterprises, and a system of agreements with the Hungarian Banking Association, on domestic banks' 'voluntary' self-restraint regarding their customer interest rates, in exchange for the government's readiness not to raise their extraordinary profit tax any further. Recently, asked by the press what the MNB had said on the latest such deal, Mr. Nagy responded that they agreed on this directly with the banks, and so what the MNB, otherwise the financial sector's supervisor as well, has to say was 'irrelevant'. The MNB, on the other hand, has been claiming that conducting interest rate policy is solely their right and responsibility under local law. Most recently, Mr. Matolcsy delivered a speech at a Budapest Stock Exchange event on February 29, where he said that since 2021, th...