Hungary May Spook Market With MNB Governor, Capital Says

Hungarian Premier Viktor Orban’s choice to lead the central bank may be a further sign of government interference in monetary policy and may “spook” investors, Capital Economics Ltd. said today.

The appointment of Economy Minister Gyorgy Matolcsy, who has spearheaded the country’s unorthodox economic policies, would “send the strongest signal” that the Magyar Nemzeti Bank’s independence “is under assault,” London-based economists William Jackson and Neil Shearing wrote in a note.

“From the perspective of the markets, Dr. Matolcsy would also be the worst choice,” Jackson and Shearing said. “He has been one of most vocal critics of the current MPC and one of the chief proponents of Fidesz’s unorthodox economic policy, which has undermined investors’ confidence.”

Orban has relied on new taxes, including special levies on the banking and telecommunications industries, as well as the nationalization of private pension fund assets to keep the budget shortfall below 3 percent and avoid losing European Union development funds. The measures helped drive the economy into its second recession in four years, damaging investment, lending, consumption and growth.

The forint plunged 1.1 percent to 292.8 per euro by 4:56 p.m. in Budapest, the most since Jan. 4, after Matolcsy said Hungary should reject “traditional” economic models including policies that kept the forint strong to fight inflation. Matolcsy commented in his weekly Heti Valasz column, published today.

Choke Inflation

Central bank chief Andras Simor, who has urged the bank to act “much more firmly” against inflation that slowed to an 11-month low of 5.2 percent in November, has been outvoted along with his two deputies on rate cuts by the four non-executive members Orban’s lawmakers appointed in 2011.

The new central bank head should follow the European Central Bank and the Federal Reserve in providing monetary stimulus, “bravely” using unorthodox tools as part of a “strategic alliance” with the government, Matolcsy, cited in media reports as the favorite to succeed Andras Simor in March, told HirTV on Dec. 22.

The central bank on Dec. 18 cut the European Union’s highest benchmark interest rate by a quarter-point for a fifth month, to 5.75 percent as the majority of the Monetary Council looked to jumpstart the economy.

“The irony of this is that the appointment of a loyalist could actually limit the room for rate cuts by leading to a rise in Hungary’s risk premia and a sell-off in local assets, thus forcing a tighter policy stance,” Jackson and Shearing wrote.

The mandate of Simor’s two deputies, Ferenc Karvalits and Julia Kiraly, also end this year.

“If the government replaces them with loyalists as well, we could be in a situation whereby the entire MPC is dominated by government allies in the second half of the year -– spelling further losses in the bank’s credibility and further falls in local assets,” Capital Economics said.

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