Feb. 19 (Bloomberg) -- Hungarian Prime Minister Viktor Orban will probably expand the central bank’s rate-setting Monetary Council as the board prepares to channel cheap loans into the recession-hit economy after a new Magyar Nemzeti Bank president is selected, Citigroup Inc. said.
Orban may expand the Monetary Council to nine members from the current seven, including by adding a third vice president, Citigroup’s Budapest-based economist Eszter Gargyan said in research note today after meeting government officials and monetary policy makers last week.
“Market consensus” shows Economy Minister Gyorgy Matolcsy remains the favorite to succeed central bank President Andras Simor, whose six-year term ends March 3, Gargyan said. Matolcsy headed Hungary’s self-described unorthodox policies, such as pension-fund nationalization and industry tax increases, and pledged a “strategic alliance” between the government and the new central bank leadership.
Changes on the Monetary Council “will likely deliver changes to policy that may be key drivers to local asset prices,” Gargyan said.
The MNB’s new leadership may focus on channeling “cheap, below market-rate funding” into the economy via state-owned or state-controlled banks after six consecutive quarter-point rate cuts to 5.5 percent failed to boost lending, she said.
While policy makers may trim the European Union’s highest benchmark rate to as low as 4.5 percent if market conditions remain supportive, quantitative easing could limit the central bank’s rate-cut room, Gargyan said.
Monetary Council members “stand on the conservative side about lowering foreign-currency reserves at a faster pace than the reduction in the countries’ external debt falling due, and they do not seem to agree with any form of monetary financing apart from major market disruptions,” Gargyan said.
Orban, who faces re-election in the second quarter of 2014, is under pressure to kick-start growth after narrowing the budget gap to less than 3 percent of output in 2012 at the cost of driving the economy into its second recession in four years.
Hungary may exit the excessive-deficit procedure in December, lifting the threat of EU funding cuts, Gargyan said, though this is unlikely to lead to a “major loosening” of the budget before elections. The government may present additional budget steps before April 15 to push the deficit below 3 percent of GDP this year and in 2014, she said.
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