Architect of unorthodox policy to head Hungarian central bank

By bne IntelliNews March 1, 2013

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Confirming both one of the most widely expected appointments of recent times and the market's deepest fears, Hungarian Prime Minister Viktor Orban named Economy Minister Gyorgy Matolcsy as the next governor of the National Bank of Hungary (NBH) on March 1.

Touted as the architect of Hungary's "unorthodox" economic policies - which critics argue have helped push the country back into recession - Matolcsy has long been viewed as the most likely to take over from Andras Simor, the outgoing central bank chief whose six-year mandate expires on March 3.

Matolcsy's post leading the economy ministry will be taken by Mihaly Varga, the far-more-respected state secretary in charge of aid talks with the International Monetary Fund (IMF) and EU. The new minister will continue to serve this function, the PM said, apparently without irony - those negotiations have been effectively dead for months.

The worry for the markets is that Matolcsy will introduce his "creative" policy making at the NBH, which is already in the midst of a long easing cycle thanks to the dominance of government-appointed members of the monetary policy council over Orban's sworn enemy Simor. The governor has been unable to prevent the ongoing series of cuts to interest rates, despite his warnings of currency and inflation risk.

Analysts at Erste Bank point out that Orban set the new NBH governor up with a clear invitation to use his talent for unorthodox policy in his new role. "The PM said that there are 16 tools used by central banks in the world to boost the economy, which suggests in our view that there should be at least some new, unconventional steps with the new governor," Erste says.

In the last few weeks, Matolcsy - who in his time has overseen policy that has enraged the EU and IMF, as well as practically halting bank lending - has been attempting to re-paint himself as a supporter of conservative monetary policy. That was the surest sign there could be that the job was his, following slip-ups in the previous few months when his comments on the currency sparked sharp slides in the forint.

The forint lost a little ground on the announcement, but movement was understandably limited given the fact that the appointment was so widely expected.

Nomura's Peter Attard Montalto suggests that confirmation of Matolcsy means the end of orthodoxy and the start of "funky postmodernism" at the NBH. "The initial reaction in [the forint] may well be small, but the news is broadly priced in," he points out. "It's when policy changes start happening that we see the bigger market moves develop."

Attard Montalto also notes that given it was always clear Orban would appoint a yes-man, the actual name on the door of the central bank chief's office doesn't matter all that much. "It is irrelevant who the governor or deputy governors are - the same policy mix will come directed by Orban and Matolcsy," he says. "It is just under Matolcsy we will have a greater and more dramatic loss of credibility, of staff from the institution (already press reports today about staff being 'screened' for if they will be compliant to the new order), less transparency, a removal of unbiased research and analysis on financial sector and fiscal issues."

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