Forint Strengthens, Yields Fall on Matolcsy Central Bank Pick

The forint strengthened and government bond yields fell after Hungarian Prime Minister Viktor Orban picked Economy Minister Gyorgy Matolcsy to become central bank chief.

Hungary’s currency plunged the most among emerging-market peers in February as media including Nepszabadsag newspaper and Index, a news website, reported Matolcsy is set to lead the Magyar Nemzeti Bank through 2019. Orban confirmed the appointment today on state-run MR1 radio. Monetary Council members appointed by Orban’s Fidesz party have cut the benchmark rate to a record 5.25 percent in February.

“Matolcsy’s name had been widely cited in the last few weeks, so this isn’t much of a surprise to the market,” Siddharth Kapoor, a London-based strategist at Deutsche Bank AG, wrote in e-mailed comments. “Ultimately, I think the government wants to ease policy and at the same time let the forint deteriorate in a controlled manner.”

The currency appreciated 0.3 percent to 294.44 per euro by 4:15 p.m. in Budapest, after initially depreciating as much as 0.3 percent on Orban’s announcement. Yields on the government’s 10-year bonds fell eight basis points, or 0.08 percentage point, to 6.246 percent.

The appointment of Matolcsy, who in December called for unconventional monetary policy to help emerge from recession, was approved by a parliamentary committee today before President Janos Ader makes a formal appointment.

Rates Policy

Matolcsy, who is due to take over from March 3, said in a Jan. 30 interview with the Wall Street Journal that the central bank should pursue a “conservative” policy course. Those comments helped ease concern that his appointment will hurt Hungarian assets, Kapoor said.

The central bank will support the government’s efforts to boost growth if that doesn’t threaten price and financial stability, Matolcsy said at the parliamentary hearing today.

The bank may choose from methods already used by monetary authorities including the Bank of England, the European Central Bank or peers in eastern Europe, Matolcsy said.

Markets will remain “volatile and vulnerable” until it becomes clear which tools Matolcsy chooses, Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG, wrote in an e-mailed report.

“Whether to achieve it with market compatible and successful measures or with futile ones depends on the new central bank leadership,” Torok said.

Mihaly Varga, minister in charge of negotiations with the International Monetary Fund, will take over Matolcsy’s role at the Economy Ministry, Orban said.

Test Market

While Matolcsy isn’t a market-friendly choice, the government has already “tested the market” with press leaks, which helped the forint recover, said Robert Csajbok, a Budapest-based currency trader at ING Groep NV.

“This scenario tells me there will be volatility but not clear-cut weakening” in the forint, Csajbok said in e-mailed comments to Bloomberg.

Outgoing central bank President Andras Simor has opposed lowering rates, saying that the easing won’t help Hungary emerge from recession.

Hungary’s purchasing managers’ index declined in February, indicating that the expansion in manufacturing slowed as the country struggled to recover. The PMI fell to 54 points from 55.9 in January, MLBKT, the company which compiles the data, said in a report today.

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