Hungary central bank says government 'attacks' could limit scope for easing rates

Hungary central bank says government 'attacks' could limit scope for easing rates

Hungary's Central Bank said on Thursday repeated "attacks" by Prime Minister Viktor Orban's government on its monetary policy could backfire and limit the scope for easing.

Orban and his former ally, central bank Governor Gyorgy Matolcsy, have been involved in an increasingly bitter policy spat since a 2022 election, with the sides trading blame over a surge in inflation to the highest levels in the European Union.

Inflation pushed Hungary's economy into a recession last year, with the recovery facing headwinds from prolonged weakness in Germany and a slow rebound in consumer spending.

Economy Minister Marton Nagy, one of Matolcsy's former deputies, has repeatedly criticised the National Bank of Hungary, which has halved its base rate to 9% since May, for keeping borrowing costs too high, stifling the economy.

On Thursday, the central bank hit back at a series of government measures, including caps on prices and interest rates as well as other moves it says harmed its independence and curbed the scope of transmitting its measures to the economy.

The bank said government remarks calling its inflation-fighting credentials into question shortly before rate decisions were particularly damaging.

"As a consequence, the transmission of central bank decisions can be impaired, the reactions of economic actors to the rate decision can diverge from those expected by the central bank and as a result of an increase in risks, the optimal rate path can move higher, in contrast to government intentions," the bank said in a statement.

Matolcsy enters his final year at the helm of the NBH with inflation, which topped 25% last year, still above the bank's target and risks of a rebound in the second half.

The bank has slashed its base rate by 900 basis points since last May, but with global central banks likely keeping interest rates higher for longer, the scope for further aggressive cuts is narrowing.

On Wednesday Finance Minister Mihaly Varga said Orban's government could discuss legislation next week that would widen the central bank supervisory board's controls over activities outside its basic tasks, such as setting monetary policy.

The planned amendment to the central bank law, which the government says would boost transparency, has also drawn criticism from Matolcsy on the grounds it could harm the bank's independence.