Last non-Fidesz policymaker jumps from Hungarian central bank

By bne IntelliNews April 9, 2013

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It's taken new governor Gyorgy Matolcsy just a month to oust the last remaining member of the Magyar Nemzeti Bank's (NMB) monetary policy council (MPC) that was not appointed by the ruling Fidesz party. As Julia Kiraly resigned her post on April 8, the departing deputy governor gave the new regime both barrels, though it had little impact on markets.

Kiraly's resignation letter to President Janos Ader was sent just two working days after she complained of being rushed into a decision on the MNB's stimulus measures, which were approved on April 4, and three months before the end of her six-year term. In a missive which blasted the central bank's new mode of operations, she said she no longer felt able to put her name to policy decisions that she believes may prompt a loss of confidence in the bank and damage the economy.

Matolcsy, credited as the architect of much of the Fidesz government's controversial "unorthodox" economic policy, was appointed by Prime Minister Viktor Orban to succeed arch-enemy Andras Simor in March. While the previous governor had been latterly hamstrung by Orban's expansion of the MPC earlier - leading to a six-month easing cycle despite his warnings on currency and inflation risk - fears of more unconventional actions from the new governor have dominated the market, and depressed the forint since the start of the new year.

Restrained by the large volume of foreign currency debt that's held by Hungarian institutions and households, Matolcsy has been relatively conservative in terms of policy thus far. However, he almost appears to be willfully trying to disturb investors via his internal administration of the MNB.

Some complaints of the old guard at the central bank look like standard responses to change at the top, magnified by a media corps happy to hammer Orban & Co. to fill their pages. That has seen unnamed staff moaning of office moves and the like. However, other moves appear more of a concern. Power has been concentrated in the governor's hands, while several senior economists were released instantly. Meanwhile, the traditional news conferences given by the governor and designed to help clarify policy for investors (a central plank for any central bank) have been stopped.

Adding to the concern, Kiraly's resignation came four days after she abstained from a vote on economic stimulus measures. She complained on April 6 that she was given a 40-page document on the issue just 35 minutes before it was put to a vote. The scheme to offer cheap credit to small business was met with relief by the market, who are on tenterhooks over Matolcsy's moves. The fact that the meeting on the issue was sprung on it at the last minute didn't help calm those nerves.

It was enough to push the last of the eight-member MPC not appointed by the current government to jump. "Decisions have been made that could cause serious damage not only to the National Bank of Hungary but in the longer term also to the Hungarian economy... I can see an increasing likelihood that the central bank's decisions may become not necessarily well-founded and mistaken, for which I don't wish to take any responsibility, neither as a deputy governor, nor as a member of the monetary policy council," Kiraly wrote in her resignation letter.

Given that Kiraly was in a minority of one-to-seven on the MPC, it's little surprise that the markets shrugged off the resignation. In fact, with the Bank of Japan's (BoJ) recent stimulus announcement doing the legwork, the forint had risen by the end of the trading session and yields contracted, according to Bloomberg. Investors may be disturbed by the erratic nature of Orban's policies, but the huge volume of liquidity swilling around the globe has them sticking with high yielding Hungarian bonds and the forint for the meantime, despite recent peaks and troughs provoked by the new MNB administration.

"Risks surrounding recent changes in the leadership at the [MNB] have started to dissipate in the market over the last couple of days, partly supported by the newly announced monetary stimulus program of the BoJ which makes high-yielding currencies even more attractive," suggest analysts at Erste Bank in a note.

They add that the renewed momentum for global liquidity may well offer Budapest more space to manoeuvre, writing: "This may provide further room for the monetary council to reduce rates going forwards. We had expected that the ongoing rate reduction cycle would come to a halt at 4.75%; however, this prediction seems a little bit pessimistic now and the base rate could even reach 4% in the coming months. Lower rates, however, do not suggest any spectacular forint appreciation and we still expect the EUR/HUF to stand slightly above 300 at the end of June, and at 295 at the end of this year."

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