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March 1, 2013 11:13 am
The architect of Hungary’s controversial economic policies has been named governor of the central bank in a move investors fear could erode the bank’s independence and usher in unorthodox monetary policy.
Prime Minister Viktor Orbán confirmed his choice of Gyorgy Matolcsy, economy minister, as the next governor in an early morning radio broadcast, after widespread speculation in recent weeks that the close ally of the premier would get the job.
The six-year appointment extends the control of the ruling Fidesz party, whose loyalists already hold many of the top state positions. Mr Matolcsy would be difficult for a new government to remove even if Fidesz lost general elections in 2014.
But the news was balanced by the naming of Mihaly Varga, seen by the markets as a safer pair of hands, as new economy minister.
“Our [assumption] is that [Hungary’s national bank] is now a non-independent central bank,” said Peter Attard Montalto, emerging market economist at Nomura. “Whilst we shall wait to see how things unfold, our view is that Matolcsy will be there to build a close partnership with government, to do a politically motivated policy mix, and to probably still very much be a Fidesz person.”
Mr Orbán is under pressure to jump-start growth ahead of next year’s election, after Hungary slumped back into recession last year – which many independent analysts believe partly was a result of Mr Matolcsy’s economic policies.
Since Fidesz won a two-thirds parliamentary majority in 2010, Hungary has reduced government debt, central Europe’s highest, and the budget deficit to the point where the country may exit the EU’s excessive deficit procedure this year.
But is has used an unorthodox policy mix including the EU’s biggest bank levy, “crisis” taxes on some industrial sectors and nationalising a compulsory private pension system.
Though Mr Orbán’s government says it has stabilised the economy so that growth can restart, independent economists suggest it has damaged investment and alienated banks such that loan growth is very weak.
Investors fear Mr Matolcsy will now press to loosen monetary policy as a way of stimulating growth – with potentially risky consequences for the forint and inflation.
The economy minister has several times called for unconventional monetary policies to support growth, criticising the “strong forint” policy of the outgoing bank governor, András Simor, with whom the government repeatedly clashed.
Mr Orbán on Friday defended his choice as the “least risky decision” and insisted the “central bank is independent and that cannot be questioned”.
Ferenc Kumin, a government spokesman, added in an official blog: “It’s safe to say we can expect . . . conservative, cautious leadership from Matolcsy in the future as central bank governor.”
But he added it was only possible “to ensure the central bank is able to fit its work within the whole of our economy policy . . . if we nominate for central bank governor someone who has seen government work from up close”.
The forint, which fell sharply in February as speculation grew that Mr Matolcsy would be appointed, rose slightly after the news was confirmed. The governor designate was set to appear before the parliament’s economic committee on Friday afternoon.
David Nemeth, chief macroeconomic analyst at ING Hungary, said markets expected Mr Matolcsy to loosen monetary policy, continue a cycle of rate cuts and potentially offer cheap loans to banks to boost lending to the corporate sector.
“The question is how aggressive these measures will be,” Mr Nemeth said. “If it is just a cautious approach, then it’s not so dangerous. If it is more aggressive and international sentiment should change at the same time, then it could hurt the forint, and the economy.”
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