Simor Says Hungary Monetary Stimulus Would Damage Economy
The Hungarian Cabinet pushing through a plan to boost growth through monetary stimulus under a new central bank chief would damage the economy, outgoing Magyar Nemzeti Bank President Andras Simor said.
The central bank has worked to reduce policy unpredictability in Hungary, the single biggest difficulty for the economy, Simor told reporters in his office in Budapest yesterday. Using monetary stimulus would also hurt the bank’s credibility, said Simor, whose six-year term ends on March 3.
Prime Minister Viktor Orban’s government is looking to stimulate an economy going through its second recession in four years, with elections scheduled for next year. The new central bank chief should “bravely use unorthodox tools” to provide monetary stimulus, including measures used by the European Central Bank and the Federal Reserve, Economy Minister Gyorgy Matolcsy, Simor’s most likely successor according to the Index news website, said last month.
“In an environment where there’s a problem with regulatory certainty and predictability, it’s very important that the central bank keeps this position because if central bank actions turned unpredictable, that would just make the situation significantly worse for the Hungarian economy,” Simor said.
The forint was the second-best performing currency last year, rising 8.1 percent against the euro and partially recouping a 16 percent drop in the second half of 2011. The currency, which fell to a seven-month low of 298.46 per euro on Jan. 14, hasn’t been at “extreme levels” for “quite some time,” Simor said. It traded at 292.5 per euro at 9 a.m. in Budapest.
Monetary-policy control has already slipped from Simor. Along with his two deputies, he has been outvoted on rate decisions by non-executive members governing party lawmakers appointed in 2011. The bank cut the two-week deposit rate to 5.75 percent on Dec. 18, the fifth quarter-point reduction in as many months to the lowest level in almost two years.
Simor, who has survived government attempts to oust him and has fought to keep the central bank free of the Cabinet’s influence, said the monetary easing was unjustified from an inflation point of view and will probably have little effect on growth as long as lending is subdued.
The central bank needs to act “much more firmly” against inflation, Simor said on Dec. 7. Consumer prices rose 5 percent last month from a year earlier, the slowest pace in a year. The central bank has a “credibility problem” when investors forecast further rate cuts and predict inflation to be faster than policy makers’ 3 percent target on a two-year horizon, Simor said yesterday.
Orban has used what his government described as unorthodox measures to close budget holes and avoid cuts in European Union funding, contributing to the economic slump. They included the effective nationalization of private-pension fund assets, imposing retroactive industry taxes, levying the highest bank tax in Europe and curtailing the power of courts.
The government will need to take additional budget steps to keep the budget deficit within 3 percent of gross domestic product in 2014, one of the factors the European Commission will consider when deciding whether to lift the excessive-deficit procedure against Hungary, Simor said.
The central bank has used “unconventional tools” in the past four years, including to improve liquidity in foreign- exchange markets, to stabilize forint funding of local lenders and to restore the functions of the government- and mortgage- bond markets, Simor said yesterday, defending his record against government criticism that the bank hasn’t done enough to help growth.
“Our record when using so-called unconventional tools is excellent, we’ve done more than anybody in the region and we’ve tried all the tools that are possible to be used for a small, open emerging-market economy,” Simor said.
The new central bank leadership is “almost certain” to stop paying interest on commercial banks’ mandatory reserves held at the central bank and will probably also cut the interest rate on two-week MNB bills, Mihaly Patai, the former head of the Hungarian Banking Association and chief executive officer of the local UniCredit SpA (UCG) unit said on Dec. 20, according to the Budapest-based newspaper Vilaggazdasag.
Commercial banks can manage their liquidity using the central bank’s two-week notes that pay an interest equal to the base rate. Cutting the interest rate on this instrument would be tantamount to “significant” monetary easing, Simor said.
The announcement on the new central bank chief will come “in due time,” Orban said in an interview on public radio MR1 today, adding that “absolutely no decision” has been made on Matolcsy replacing Simor. Orban may name his candidate at a three-day ruling-party retreat that starts Feb. 5, Index said yesterday, without citing anyone.
“Loyalty to the Orban vision for Hungary, rather than independence, are probably high up on the list of attributes now being looked for in potential candidates,” Timothy Ash, head of emerging-market research at Standard Bank Group Ltd. in London, said in e-mailed comments today.
Gyula Pleschinger, an Economy Ministry state secretary, has emerged as a potential choice, Royal Bank of Scotland Group Plc strategists Phoenix Kalen and Demetrios Efstathiou said in an e- mail yesterday after meeting with government and central bank officials.
Rate cuts may remain the “key tool” of monetary easing, with the main rate dropping to 4 percent, while adopting quantitative easing via purchases of government bonds is “highly unlikely,’ RBS said.
It would cause ‘‘more harm than benefit’’ to embark on ‘‘general quantitative easing,’’ Simor said, adding that this has been done by countries where the benchmark rate is close to zero and where inflation on the monetary-policy horizon is below target.
‘‘Well, nothing of this applies to Hungary: inflation isn’t below the target on the monetary policy horizon, so there’s really no reason to loosen to start with,” Simor said. “If it were below target and the central bank wanted to loosen, it could reduce interest rates. So there’s absolutely no reason to use quantitative easing as such.”