Budget Committee To Helm “Ministry of Silly Talks" Sketch With NBH Chief Simor

Albert Molnár, a Socialist member of the Committee said the rate hike was damaging, costly and groundless, and so he gave his support to Varga's idea. The first things that pop into our mind with regard to the whole issue is a place called Absurdistan and a uniq Hungarian version of a famous Monthy Python sketch, the "Ministry of Silly Walks ". 

If we wanted to crack bad jokes we would say that it is those people that want to summon Simor for a hearing now who provide stupendous proof for their incompetence on their very own turf almost every day.

In this regard, we could mention the dreadful tax proposals and the joint and successful efforts to sabotage the public finance package - and these are only from the past weeks. Or with regard to the gigantic and obvious disproportion we could start moaning about the fact that our political elite that has been wallowing in the pond of political laziness since 2001 now freaks out about a 25-bp rate hike.

But let's drop these aspects for a sec. After all, we live in a democracy where you can indeed question the central bank's decisions. But first let's give some thought as to why the NBH raised its base rate yesterday.

If we assess the very situation we are presently in, we find a case that is exceedingly simple. The central bank believes that its inflation target, which it had set jointly with the government, is in danger, and bound by the letter of the Central Bank Act it tries to take measures to achieve price stability. Those criticising the MPC's Monday decision have no other task but to modify the inflation target and rewrite the Central Bank Act. They would see the consequences at once: the loss of credibility at the NBH would be so huge that it would cause a considerable forint depreciation, skyrocketing inflation, shrinking private consumption and real economy loss.

Of course, there may be subjective elements in the assessment of the current situation. Some may think that despite a clear indication by the NBH the inflation goal could in fact be achieved and they may also be concerned about the negative implications of monetary tightening on economic growth.

OK, fine. Then please someone explain why a 25-bp rate increase would obliterate the local real economy (completely insensitive to domestic interest rates) and the export sector that is performing well at the current exchange rate even at a sliding European business sector.

If one tries to find the reasons for Hungary's growth predicaments, he should better look under the rock of fiscal policy. It wouldn't hurt to grab a book too... like Basic Economics.

You may also ask whether it is the fault of the central bank that inflation risks are so massive in Hungary. Looking back, we can state that monetary policy has recently been unjustifiably optimistic about the inflation course and so it was uncertain how the MPC would react to the situation. Whether it will now have to raise rates even further or it could have “saved" some monetary tightening if it had acted earlier is now impossible to answer, but we do not believe so.

At the same time we must see that the NBH cannot be held responsible for the current inflation. The key role in the slow disinflation is played by exogenous shocks (food, energy, base materials), but Hungary is lagging behind in respect of CPI in regional comparison, as well. And this may also be blamed on bad economic policy moves made by the government. The election stop-go cycles, the faulty structure of fiscal adjustment, the irresponsible regulatory price policies and a long running denial of central bank device independence laid the very foundation for Hungary to be the only country in the region that has been unable to reach a real price stability for decades. And the central bank was not on stage in this particular scene.

So if someone is keen to see why the MPC hiked rates now should leave the NBH Governor alone and rather summon in front of a parliamentary committee the entire political elite, which is totally impassive about inflation.

Of course, a Simor hearing would not be without an advantage either, as some MPs would at least learn some basic lessons on economic policy. We have the feeling, though, that it would not take much effort by the Monty Python group to turn that hearing into another “Ministry of Silly Walks" sketch."

Source: Portfolio Online Financial Journal