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Forint Plunges as Government Consolidates Power at Central Bank

March 4 (Bloomberg) -- The forint weakened, leading declines among emerging-market peers, on speculation Hungary’s government may use expanded powers at the central bank to utilize foreign-currency reserves to stimulate the economy.

The currency plunged to its lowest level in five weeks after former economy minister Gyorgy Matolcsy began his six-year tenure as Magyar Nemzeti Bank president by rewriting the central bank’s founding document to concentrate power in his hands. Hungary will debate using the reserves for stimulus or helping foreign-currency borrowers, Mihaly Varga, who is taking over from Matolcsy in the government, told TV2 in an interview today.

“This will likely put pressure on both the forint and Hungary’s foreign-currency bonds,” Erste Group Bank AG wrote in an said in a research note by analysts including Zoltan Arokszallasi on Varga’s comments.

The forint depreciated 1.1 percent to 298.05 per euro by 5:40 p.m. in Budapest, its weakest level since Jan. 29. Yields on Hungary’s dollar-denominated bonds maturing in 2041 fell two basis points, or 0.02 percentage point, to 6.612 percent, the lowest in a week.

Matolcsy stripped central bank vice presidents, including two current ones who were appointed by his predecessor, of the right to independently represent the MNB, according to the document, which Matolcsy signed on Feb. 28 as Economy Minister and which entered into force today.

The central bank president will also decide all appointments, firings and salaries, which he can delegate to the managing director, according to the document published on the bank’s website.

Rate Cuts

Prime Minister Viktor Orban announced the appointments of Matolcsy and Varga on March 1, after policy makers delivered seven consecutive quarter-point rate cuts, bringing the benchmark to 5.25 percent, matching the lowest on record. Outgoing central bank president Andras Simor and his two deputies opposed the easing, citing an inflation rate above the central bank’s 3 percent target and the limited impact on lending and economic output.

The forint tumbled to a seven-month low after Matolcsy said in December the new central bank leadership should “bravely” turn to “unorthodox” monetary-policy tools to create growth. The Magyar Nemzeti Bank should help the government boost growth as long as that doesn’t threaten price and financial stability, Matolcsy told lawmakers on March 1.

Reserves

“Until it becomes clear whether Matolcsy might be the wolf in sheep’s clothing after all, euro-forint is likely to trade well above the 290 mark,” Carolin Hecht, Frankfurt-based strategist at Commerzbank AG, wrote in a research report today.

Gyula Pleschinger, nominated to the Monetary Council today after serving as Matolcsy’s deputy in the ministry, told lawmakers he will use his tenure at the bank to support the government’s policies to boost growth. Currency reserves must be treated “very cautiously” and can’t be used to finance the budget, Pleschinger told reporters after the hearing.

“The big re-shuffle at the core of the Monetary Council will open the way for potential unorthodox measures on the monetary policy front, along with some continuation on the easing cycle,” Luis Costa, a London-based strategist at Citigroup Inc., wrote by e-mail today.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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