Now that György Matolcsy has completed the first half of his six-year term as President of the National Bank of Hungary (Magyar Nemzeti Bank, MNB), the chief question to be asked is whether it will be possible, during the remaining barely three years, to maintain the kind of energy circulation policy that has characterised the monetary period from 2013 to the present. In this paper, I will look at the initial conditions from which the National Bank, with György Matolcsy at the helm, has transformed Hungarian public finance, employing unconventional means to become a driving force behind sustainable economic growth. Of course, achieving price stability also remains a top priority for the MNB. Hence, I will also look at the issue of the base interest rate, held at a historic low during this period.

The MNB’s recently published 150-page Mid-Term Report presents the events and results of the first half of the presidential term, begun in March 2013, as seen by MNB experts. The release has drawn both praise and criticism, the latter from economists with opposition leanings, who have been less than enthusiastic in cheering the MNB’s measures and their intense impact on finance and the real economy. These measures have included, among others: cutting the interest rate, introducing incentives for corporate lending as part of the pro-growth loan programme, the acquisition of the formerly Austrian-owned Budapest Stock Exchange, the bailout of the major commercial bank MKB, the conversion and reduction of foreign currency-denominated mortgage rates, the replacement of bank notes, and the transformation of the MNB into a profitable institution. All of the above took place while enabling the financial self-sufficiency of Hungary’s lending sector and, partly as a consequence, significantly minimising the country’s susceptibility to external factors. It should be noted here that the Hungarian economy has been extremely vulnerable to external factors, which makes its exposure to markets a vitally important consideration, particularly in times of global economic crisis. No wonder then that Hungary was among the hardest hit by the global meltdown in 2008—2009. Suffice it to recall that, in 2009, Hungary’s GDP — the prime indicator of economic performance — shrank by 6.6 per cent. The economy had not shrunk so drastically since the aftermath of the political transition in the early 1990s. Even those discussing economics as a matter of daily occupation seem profoundly divided on the question of whether the monetary policy pursued by the MNB under György Matolcsy, and likely to be continued in the coming years, is to be regarded as “orthodox” or “unorthodox”. Incidentally, this vocabulary was invented by none other than the MNB president himself who, in his former capacity as Minister for the National Economy, more than once proclaimed an end to the wishy-washy economic policy favoured by the socialist-liberal governments, including interventions aimed at taming the effects of austerity measures.

This is not the place to comprehensively assess the contributions of former MNB presidents. However, no account of the country’s putting its financial house in order would be complete without mentioning the fact that Hungary managed to slough off a stigma by observing a strict fiscal policy and meeting the deficit targets set by the European Union. That stigma had been damaging us since we acceded to the EU in 2004. The country until 2013 had been subject to an EU infringement process courtesy of the socialist-liberal governments that had failed to observe the three-per cent deficit ceiling determined in proportion of the GDP. It was yet another “event” where Hungary — a nation in the heart of Europe — proved incapable of staying an economic course it had set out for itself. Needless to say, falling short of the deficit target entailed a failure to meet envisioned rates of inflation, growth and indebtedness as well.

But let us return to the turbulent waters of domestic monetary policy. When in the spring of 2013 György Matolcsy took over at the helm of the MNB, his foes and detractors — including more than one former teammate, friend and colleague — would bet the farm on the imminent demise of the new president. They reckoned that his easily misunderstood public statements and overall communication would demolish the forint, drag down stock exchange prices, and finally burn the country’s FX reserves on the altar of economic growth. For György Matolcsy as an economist is widely known for his penchant for growth. Looking back at the so-called “market expectations” three years ago, one remembers more than a few experts whose prediction for the new MNB era included an exchange rate of 500 forints to the euro — which then continued to stay in the 300—310 forints range.

But one might also be forgiven for asking about what kind of baggage or skeleton the new president found in the cupboards of the headquarters when he took over. To start with, the former leadership of the MNB had defaulted on every one of the mandates stipulated by the National Bank Act. Stability of prices and finances was a distant memory. Moreover, not only did the central bank not support the government’s economic policy, but there was in fact an all-out stalemate between the makers of monetary and fiscal policy, despite the ongoing aftershocks of the global crisis. And let us remember the enormous losses the central bank had posted during the former administrations. Although these losses were carried over to 2013, a newly adopted proactive policy steered clear of a negative balance, a condition for terminating the EU’s already mentioned excessive deficit procedure against the country.

Is it Hungarian? Is it National? Is it a Bank? Indeed, these were the questions to answer.

One way to put it would be by saying that the year 2013 dotted the i’s and crossed the t’s of financial consolidation after the new administration took office in 2010, principally by rescuing the country from the process that had jeopardised our ability to call support funds from the EU.

For the sake of clarity, in what follows I propose to divide our topic into major economic themes and factors in an effort to assess the new era of the MNB and what it has meant for Hungary’s economy at large.


The Hungarian economy has been virtually free of price pressure for years. This fact is particularly noteworthy given that the drastic devaluation of the domestic currency had been a malignant influence on financial development here for decades. The National Bank Act assigns to the MNB the foremost task of achieving and maintaining the stability of prices, at a rate projected at around three per cent by the MNB experts. Essentially, inflation has been non-existent in Hungary for two years. In fact, there have been months marked by deflation. It goes without saying that low inflation will be more beneficial than a level of deterioration of the national currency that is kept artificially high. Low inflation is good for the economy because it boosts the purchasing power of personal income. Put simply, people will buy more goods when they are confident about the value of their money. Since March 2013, the MNB has followed and met its mid-range inflation targets first adopted in the early 2000s.


Let us now take a look at the first and foremost tool in the hands of a central bank: the cutting of the base interest rate and its fallout. In 2011, the central rate was still 7 per cent, and it only started to drop because the Monetary Council, formerly composed of hard-line leftist-liberal experts, had been infiltrated by external experts. From left and right in the profession, people would sound the alarm warning against the massively negative consequences of Matolcsy’s rate- cutting policy. However, at the time this goes to print, the base rate is still a steady 0.9 per cent, the lowest ever in the 90-year history of Hungary’s National Bank. To put this in perspective: this figure is very close to the zero per cent official rate posted by the European Central Bank. And I am confident that the benefits of a low interest rate need not be explained any further, even to those less well-versed in economics.

Above all, what low interest rates entail is inexpensive credit, which invigorates economic growth while scaling back gains in the commercial banking sector but exerting a favourable influence on central fiscal processes. The two consecutive cycles of reduced base rates have enabled the national budget to save hundreds of billion forints owing to a lower burden of servicing the national debt, a liability that had been putting some of the biggest dents in the country’s resources. For instance, in 2012, financing the national debt cost the country roughly 1,250 billion forints, or 4.5% of the GDP. Not surprisingly, the other major drain of financial resources were the interest rates, kept high by the former MNB executives in an attempt to counteract the forces of inflation. Yet the price pressure on the economy had remained intense despite these efforts.


At the time György Matolcsy took office, stringent conditions and high interest rates were pretty much preventing the majority of domestic small to medium- size businesses from accessing new lines of credit. When the new program took off in mid-2013, the loan portfolio of enterprises had been dwindling at a rate of 5 to 7 per cent annually. Then, in the first and second phase of the pro-growth loan program, no fewer than 31,000 companies were able to take out low-rate, long-term loans totalling more than HUF 2,100 billion, making the MNB one of Europe’s most successful SME (Small and Medium-sized Enterprise) loaners. Indeed, the project has afforded resources to more ventures than all the targeted EU funds dispensed between 2007 and 2013. Although the programme will be phased out to prevent long-term distortions in the macroeconomic system, it is being replaced by a pro-growth loan scheme intended to encourage investment and financing, both indispensable for productivity to pick up pace. In other words, the original loan programme, now being phased out, was a purpose-designed specific measure in an environment held back by a stagnant corporate lending market. All in all, the MNB’s loan programme for businesses has contributed 1.5% to the GDP, followed by another 1% owing to the effects of reducing interest rates.


If you consider financial consolidation as an act of instant response of damage control, then you must regard the foreign currency-denominated loan as a ticking bomb. Despite the MNB and the government being assailed from all sides, they managed to step-by-step convert most of these mortgages, typically denominated in Swiss francs, and to settle accounts with the banks, until virtually all foreign currency-dominated loans were phased out. In the process, households were repaid the sums the banks had gained through unreasonable profit margins and unilateral hikes of interest rates. More importantly, the timing of the conversion proved remarkably opportune, coming as it did just two months before the exchange rate ceiling between the Hungarian forint and the Swiss franc was abolished. Had we waited idly for that date, the national mortgage burden of roughly 3,500 billion forints would have instantly increased by another 700 billion.

Hungary’s already mentioned vulnerability underscores the importance of the ongoing conversion of the country’s private and public debt into the national currency. Favourably, the new issues intended to finance the national debt have been increasingly denominated in Hungarian forints, potentially helping to reduce the rate of foreign exchange liabilities within the total public debt from 50% in 2010 to around 30% by the end of 2016.


As a small but open economy, Hungary is obviously susceptible to any glitches in global markets. Beyond the well-known fallout of the global meltdown of 2008— 2009, the greatest challenge we face today comes from the European effects of Brexit, escalating geopolitical tensions, and the increasingly acute indebtedness of developing countries worldwide, all of which pose a threat to the growth of the global economy. Taking into account external risk factors, it is vital to ensure that each of these economies can fall back on stable foundations and, if necessary, adequate elbow room for their economic policies to manoeuvre in. The efforts and achievements of recent years have certainly equipped Hungary with the means to offset or mitigate external influences in its economic policy. In this regard at least, the state the country is in is a far cry from where we were in 2008. The countries hit hardest by 2008 were those found by the shock in an enfeebled, vulnerable condition. At the time, this meant we had to endure a major setback in lending owing to the problems in our banking system, and the crisis was deepened further by the lack of manoeuvring space of our economic policy. Compared to the formerly stubbornly negative balance, our current account has for years been showing a remarkably positive balance. As a result of a disciplined and prudent fiscal policy, the budget deficit has stabilised below the 3-per cent threshold. There has been a declining trend in external and internal indebtedness. Residential foreign currency-dominated mortgages have been phased out, and the national economy has entered a path of robust growth.


The so-called “unconventional” measures outlined above that were introduced by the MNB under György Matolcsy have in short exerted a beneficial influence on the domestic real economy. As previously mentioned, the pro-growth lending programme and the low central interest rates have made a vital contribution to economic growth. In the years ahead, too, we will desperately need the MNB to embrace an economic policy of stimulating demand, particularly as the overreach of the EU budgetary cycle this year will technically delay the disbursement of funds — funds that will eventually peter out anyway. Hungary may be aided in its efforts of catching up by maintaining an open economy, macroeconomic stability, a predictably low rate of inflation, and a reliably steady budget and external finance. At the same time, our SME sector is admittedly lagging far behind the EU average, leaving us with much to accomplish in terms of financing and sheer efficiency. Incidentally, this is the first time since 2000 that the MNB has managed to smoothly synchronise its policies with those of the government. This is a fact that cannot be overemphasised.


By buying out the Austrian owners of the Budapest Stock Exchange, the MNB has reclaimed a crucial capital institution as national property. Now there is a very good chance for the former “toy bourse” to evolve into a serious forum of trading. The goal is to achieve a capitalisation on the order of 30 per cent of the GDP from 2016 to 2020. This would boost the long-term growth of the real economy by 0.2 to 0.3 per cent annually.

There is also an urgent need for reform in economic and finance education, which in turn requires new institutions, a faculty with a new type of vision, and new curricula. The MNB has facilitated these reforms by entering into a series of agreements with various prestigious institutions, creating a school of economics and finance within the fold of Kecskemét College, endowing a School of Finance in Marosvásárhely, a doctoral programme in English and Hungarian in the Castle District of Budapest, and an intermediate finance training centre in Pest. Finally, a deal with Corvinus University has brought a team of MNB experts on board the prestigious faculty, as well as endowed a fund for merit-based scholarship.

As for integrating the former financial supervisory body, the move has enabled regulators in 10—15 months to purge the domestic financial market of brokerage firms that had operated fraudulently for a decade. Specifically, the MNB has conducted 257 prudential on-site inspections and 1,202 consumer protection audits since consolidating the supervisory function within its own organisation.


All things considered, in just over three years the current MNB leadership has brought about a number of remarkable advances. These include a tangible drop in the rate of indebtedness, plummeting inflation, inexpensive resources for the Hungarian economy, the rescue of families and businesses from the trap of foreign currency-denominated loans, a manageable level of foreign currency reserves, and the newly achieved self-sufficiency of the domestic lending sector. Most importantly, the strategic partnership between the MNB and the government has set our economy on a course of lasting and sustainable growth. Hungary is now a full-right member of the Central European Zone once again. György Matolcsy has made his decisions and acted every bit the part of a predictable, conservative central bank president, embracing and promoting an active and proactive monetary policy. At the same time, he has always been ready to step aside to make room for a younger generation of central bank executives such as Márton Nagy, Dániel Palotai, Barnabás Virág, and even former vice president Ádám Balog, who oversaw the successful bailout and privatisation of the MKB bank.

Last but not least, the signs of improvement owing to the new unorthodox monetary policy can be readily quantified. The MNB’s posted profits have increased by about one thousand billion forints, and further savings are in the wings on the order of hundreds of billion per year. Households and companies have spent hundreds of billions less in interest payments, and the low base rate alone adds one to two per cent to the GDP.

What has the MNB become? Well, this question is best answered by referring to the words the acronym stands for: it has really become Hungarian, National, and a genuine Bank.

Translation by Péter Balikó Lengyel

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