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BUDAPEST, Sept 28 (Reuters) - Hungary's central bank could not cope with curbing inflation so the government stepped in and helped rein in price growth with its own tools, Prime Minister Viktor Orban's chief of staff said on Thursday, turning up the heat on the bank.
Hungary's inflation, which peaked above an annual 25% in the first quarter, is still the European Union's highest at 16.4% in August but is expected to retreat to around 7% by December. High inflation has come at a big cost, as the economy could end up in recession for the whole of 2023.
On Monday, Orban took a swipe at the National Bank of Hungary (NBH), saying that "energy prices and Brussels sanctions have pushed inflation in Hungary to a level that the central bank cannot cope with" and the government had taken over the task and responsibility of fighting inflation.
His chief of staff reiterated the message.
"We believed the central bank could not cope with its task of curbing inflation fast, and therefore the government did its best in the past months so that we could bring inflation down to single digit by the end of the year," Orban's chief of staff Gergely Gulyas told a briefing on Thursday.
When asked if this meant NBH Governor Gyorgy Matolcsy should resign, Gulyas said that was not the case. He said average inflation could slow to 3.5-6% next year.
The central bank declined to comment on Thursday. On Monday its deputy governor Barnabas Virag said the bank and the government were "on the same page" about lowering inflation.
Matolcsy, whom Orban had referred to as "his right hand" in the past, had sharply criticised the government's price caps, saying they had boosted inflation by 3 to 4 percentage points as retailers sought to make up for lost profits by raising the price of other goods.
Hungary's central bank cut its one-day deposit rate by 100 basis points to 13% on Tuesday, unwinding all its emergency rate hikes launched last October. It pledged cautious policy for the coming months as it proceeds with its easing cycle.
Peter Virovacz, an analyst at ING in Budapest, said the spat between the government and the NBH did not bode well for investor confidence.
"In this challenging situation, playing the blame game only worsens investors' impression about Hungary. Even if it is just a simple political narrative, this can erode investor confidence, increasing the risk premium on Hungarian assets," he said. (Reporting by Boldizsar Gyori and Krisztina Than Editing by Mark Potter)