Weakening forint: policy dispute wreak havoc on Hungarian currency

Hungarian forint to continue depreciating amidst deepening conflict between the Hungarian National Bank and the government, economist warns.

The Governor of the Hungarian National Bank (MNB), György Matolcsy, expressed harsh criticism of the Hungarian government in recent days, RTL reports. According to Matolcsy, the government intentionally undermines the independence of the central bank.

The root of the policy dispute

Matolcsy accuses Márton Nagy, the Minister of Economic Development, of personally spearheading legislation aimed at curbing the MNB’s autonomy. Furthermore, Matolcsy contends that Nagy’s tenure as Vice President of the National Bank was marred by significant professional misconducts, an “unacceptable leadership style” and actions contrary to the central bank’s interests, leading to his dismissal in 2021.

Márton Nagy reacted to Matolcsy’s words saying “Thank God that I have a different boss now.”

According to economist and former National Bank Governor Ákos Péter Bod, the professional conflict between monetary and fiscal policymakers is based on the fact that while the central bank would safeguard the exchange rate of the forint, the government encourages economic growth that, in turn, drives inflation. Indeed, Matolcsy has argued that fiscal policy should promote productivity and investment instead of high inflation rates that fuel deficit in the central budget.

However, Bod cautions that the personal feud between Matolcsy and Nagy escalates tensions between the MNB and the government, complicating the resolution of substantive issues. Moreover, their public discord undermines confidence in the forint, further weakening the struggling currency and thereby harming Hungarian consumers.

Looking ahead: the future of the forint

As we previously reported, the EUR/HUF exchange rate dropped to 394 following the decision of the Monetary Council to implement interest rate cuts. According to Bod, heated disputes between the MNB and the government, coupled with the central bank’s interest rate reduction initiative, could lead to a HUF 400/EUR exchange rate in the coming months.

A weakened forint, Bod explains, will inflate the cost of imported goods, directly impacting consumers in Hungary.

Policymakers convened on Monday the 4th of March for the 2024 Economic Year Opening forum to discuss the future of the Hungarian financial system. Amongst the speakers of the event will be Hungarian Prime Minister Viktor Orbán, who will reflect on the accomplishments of the Hungarian economy in 2023. He will also outline the objectives of the government for the upcoming economic year and the planned implementation of future policies.

Some of the most important issues raised at the event will likely include future efforts to reduce the central budget’s deficit, keeping inflation at bay in 2024, as well as the efficacy of the central bank’s monetary politics. Minister of Finance Mihály Varga and Márton Nagy will also be speaking at the forum. However, perhaps as a sign of the tense relationship between the Governor and the Fidesz government, György Matolcsy will not be present at the event this year.

Read also: Hungarian forint falls at brutal pace: where will it land? – Read HERE

Forint at 5-month low! – Details in THIS article

Source: RTL