Hungarian Economy Minister Gyorgy Matolcsy ruling out “shock therapy” by monetary policy makers shows his ambition to be the country’s next central bank chief, said Tim Ash, an economist at Standard Bank Group Ltd.
The Magyar Nemzeti Bank should pursue a “conservative” policy course, avoid “surprises,” and “absolutely not” engage in budget financing, Matolcsy said in an interview with the Wall Street Journal yesterday. He earlier called for the “brave” use of “unorthodox” monetary-policy tools, which helped send the forint to an eight-month low against the euro.
Prime Minister Viktor Orban will select someone to succeed central bank President Andras Simor, whose six-year mandate expires March 3. Matolcsy, the most likely successor according to news websites Index and hvg.hu, sought to ease investors concern over his potential nomination, according to Ash.
“My read is that he wants the job, and this is still part of that positioning,” London-based Ash wrote in an e-mail today. Matolcsy is on a “charm offensive” to demonstrate he can soften market opposition, he said.
The forint advanced to the strongest in more than a week, paring the depreciation in January to 0.3 percent. The currency gained as much as 1 percent to 292.18 per euro today, rising a third day, and traded at 292.62 at 12:26 p.m. in Budapest.
Simor’s successor will be named one day before his mandate expires, Orban said in Brussels yesterday, adding that he won’t “bow to market pressure.” The central bank law stipulates that all Monetary Council candidates, including the central bank governor, must go through parliamentary hearings before the prime minister submits their nominations to the president.
The “worst-case scenario” under a new leadership would be the “appropriation” of foreign-currency reserves to repay external debt while the “most serious risk” is the introduction of a new foreign-currency policy that would take interest rates significantly lower and tolerate a weaker forint, analysts at Morgan Stanley said in an e-mail today.
Non-executive rate-setters picked by Orban’s lawmakers in 2011 already hold a majority on the rate-setting panel and have wrested control from Simor and his deputies to push through rate cuts to stimulate the recession-bound economy. The central bank lowered its benchmark rate to 5.5 percent this week, the lowest since 2010 and still the European Union’s highest, in a sixth consecutive rate cut.
Matolcsy’s monetary policy suggestions aren’t “far from how the current central bank leadership approaches its task,” Janos Samu, economist at Budapest-based brokerage Concorde Zrt. said in an e-mailed note today. Matolcsy suggests a policy course that focuses more on growth without abandoning inflation targeting and without “turning monetary policy upside down,” Samu said.
Widening the central bank’s “unconventional” policy toolkit is only useful in the event of “acute financial-market turmoil,” the Monetary Council said in a statement after the Jan. 29 rate decision.
“Unconventional tools must be used cautiously in a small, open economy such as Hungary, where inflation has unfortunately not reached the target level and where the country’s risk assessment isn’t among the best in the world,” Simor said after the decision. “It’s very important that the Monetary Council also mentioned that in its statement.”
Consumer prices rose 5 percent last month from a year earlier, the slowest pace in a year and may reach the bank’s 3 percent target next year, Simor said earlier.
Hungary is struggling to exit its second recession in four years as Orban’s “unorthodox” fiscal measures, including retroactive sectoral taxes and the nationalization of private pension fund assets, eroded market confidence and sapped investments.
The country’s talks with the International Monetary Fund, stalled for more than a year, are coming to an “undesired” end after the Washington-based lender refused Hungary’s request for a flexible credit line, Orban said yesterday.
The identity of the new central bank chief is “largely irrelevant” as the person to succeed Simor “will be there to do the bidding of the government,” Peter Attard Montalto, economist at Nomura Plc in London said in an e-mailed note today. “Orban’s strategy is likely to be a softly softly approach. No big-bang change in policy.”