Hungary’s government can co-exist with central bank rate level, Orban says

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By Gergely Szakacs

BUDAPEST (Reuters) – Hungary’s government would like to see faster economic growth and more favourable credit conditions, but it can “live” with the interest rate environment set by the central bank, Prime Minister Viktor Orban told parliament on Monday.

The National Bank of Hungary cut its base rate by 25 basis points to 6.5%, earlier this month, aided by a fall in inflation and a larger-than-usual cut by the U.S. Federal Reserve.

However, the NBH, which has faced pressure from Orban’s cabinet to slash borrowing costs, said a careful and patient policy approach was justified, with its main rate still the highest in the European Union alongside Romania.

Orban said there was a “heated debate” among economists about the desired level of interest rates, which he said was “understandable” considering borrowing costs elsewhere in central Europe.

Earlier this month Orban said a new ministry would take charge of the economy and state finances as he gears up for the nomination of a new central bank governor to succeed former ally Gyorgy Matolcsy.

“I would like to make it clear that although the government would desire faster economic growth and more favourable credit conditions than today, we respect the central bank’s independence 100%,” Orban said.

“The government can live together with the interest rate environment set by the central bank.”

In power since 2010, the veteran nationalist has struggled to revive Hungary’s economy from last year’s downturn following a surge in inflation to more than 25% in the first quarter of 2023, the highest level in the EU.

Finance Minister Mihaly Varga has been widely tipped to succeed Matolcsy early next year, while Economy Minister Marton Nagy, a former central banker, could take charge of public finances under a merged ministry.

Some economists say the main risk for investors from the leadership changes would be a potential dovish policy shift, which could hit the forint and boost inflation.