BUDAPEST (Reuters) - Hungary’s new central bank governor took steps on Monday to tighten his grip on the bank at the start of a reign which foreign observers worry will help drag Hungary further out of the European mainstream.
Prime Minister Viktor Orban has already overhauled Hungary’s constitution and other laws to increase the ruling Fidesz party’s control of the media and courts and the nomination of Economy Minister Gyorgy Matolcsy to head the bank was read in a similar vein.
The new governor, author of a go-it-alone economic policy which has seized private pension assets, taxed big business and rejected IMF help, on Monday issued new rules curbing the powers of his vice governors and expanding his own rights as governor.
Prime Minister Orban also moved to appoint an additional vice-governor and his party to propose an extra member of the bank’s rate-setting panel - all moves which reinforce the control Matolcsy and the government have of policy and the bank’s operations.
Matolcsy is due to formally take over from Andras Simor, a strong critic of the government’s policies, on Monday.
“As in other areas of government we are likely to see the centralization of power to the top rather than Simor’s more consensual and inclusive style of leadership at the institution,” said Peter Attard Montalto, analyst at Nomura.
“It’s not too surprising this has occurred and as I have said before it is more the institutional shifts and communications and transparency that are the immediate concern more than postmodern monetary policy.”
Markets reacted negatively on Monday, pushing the forint down around half a percent and raising the cost of insuring Hungary’s junk-rated debt - although those moves were far from catastrophic.
The new articles of association posted on the bank’s website on Monday, signed by Matolcsy on February 28 when he was still a minister, say the vice governors can now represent the bank only jointly with the new chief director.
Matolcsy will also have direct rights over the hiring, dismissal and pay of all central bank employees and can delegate this power to a new chief director.
Earlier the vice governors had the right to represent the bank in their own field of competence.
Two of the three vice-governors at the bank were appointed by a previous Socialist-dominated administration - in contrast to the rest of the bank’s policy council, who were nominated by the Fidesz majority in parliament.
Markets expect that to lay the ground for more expansive monetary policy, possibly including some of the emergency pump-priming used by the world’s major central banks since 2008.
Facing elections in 2014, Orban needs to prove to voters that the economy is on the way out of a deep recession last year when it shrank by 1.7 percent.
At his questioning in parliament on Friday, Matolcsy said he supported “conservative, responsible” monetary policy and the bank would stay independent. But he added it must aim for a “strategic partnership” with the cabinet as long as it did not threaten price stability and also said the bank would examine new tools to boost economic growth.
Forward rate agreements price Hungarian interest rates at 4.5 percent within 3 months, from 5.25 percent now. It costs Hungary far more to fund its spending on debt markets as 10-year bond yields are now around 6.14 percent. The real cost of borrowing for ordinary Hungarians is still higher as most housing loans are at a rate of around 10 percent.
Orban also nominated a third vice governor, Adam Balog, to the bank when he picked Matolcsy on Friday but the nomination of Economy Ministry state secretary Gyula Pleschinger as an extra member of the bank’s rate-setting council may do more to comfort financial investors.
Pleschinger ran tax and financial matters at the ministry, but was previously head of the securities arm of Hungary’s biggest bank OTP as well as deputy CEO of Raiffeisen group’s local unit and the head of the Government Debt Management Agency AKK for a year in 2011.
He told the committee the bank would not lose sight of its primary mandate to control inflation but would use all means to aid growth.
Hungary’s foreign currency reserves were at a “very reassuring level,” he added, indicating that decreasing the reserves was an option if done carefully with financial stability in mind. Lowering the reserves while also lowering the country’s external debt would be ideal, Pleschinger said.
The reserves are now at around 34 billion euros, double the level where they stood at the start of the 2008 crisis.
“I do not believe the central bank wishes to use non-conventional tools,” the 59-year-old told the parliament hearing, also arguing that the government’s sway over monetary policy was nothing new and was harmless.
“If you look at it that way, theoretically, the government has had a majority at the central bank,” he said. “Even so, no decisions have been made that would have questioned either the central bank’s independence or rational monetary policy making.”
Additional reporting by Sandor Peto; editing by Patrick Graham