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Hungary PM names right-hand Matolcsy for central bank

BUDAPEST (Reuters) - Prime Minister Viktor Orban consolidated his control over Hungary’s central bank on Friday, naming the man he has called his “right hand”, Economy Minister Gyorgy Matolcsy, to head the bank in a move expected to lead to looser monetary policy.

Gyorgy Matolcsy speaks during a news conference in parliament in Budapest, September 30, 2011. Hungary's Economy Minister Gyorgy Matolcsy will be the next Governor of the National Bank of Hungary to succeed outgoing governor Andras Simor, Prime Minister Viktor Orban said on March 1, 2013. Picture taken September 30, 2011. REUTERS/Bernadett Szabo/Files

Orban, a centre-right leader, has repeatedly clashed with Brussels over a series of laws that give his ruling Fidesz party firmer control over the central bank, the judiciary and Hungarian media.

Matolcsy is the architect of Orban’s economic policies - including Europe’s biggest bank tax and the nationalisation of private pensions - which have unnerved foreign investors in central Europe’s most indebted country and contributed to the collapse of loan talks with the IMF and EU last year.

His six-year term means Matolcsy will control the National Bank of Hungary even beyond elections next year.

“This is the least risky decision,” Orban told public radio, adding that a central bank head with government experience would serve stability and predictability.

He said the central bank was independent and declined to comment on what the bank should do under the new management but stressed the importance of harmony with the government.

“Some of the tools needed for economic growth are government tools that the Economy Minister uses, while other tools are at the central bank, its governor and the Monetary Council,” he said. “These must be in some form of harmony for a country to perform well.”

Officials appointed by the parliamentary majority of Orban’s party have already been directing some central bank policy, imposing a string of interest rate cuts in recent months against the objections of outgoing governor Andras Simor.

Simor, appointed by a previous Socialist government in 2007, has been a thorn in Orban’s side as the prime minister sought looser monetary policy to revive the recession-hit economy ahead of elections in 2014. One of his two deputy governors, Ferenc Karvalits, will also leave the bank at the end of March.

To replace Matolcsy as economy minister, Orban nominated former finance minister Mihaly Varga, a close ally seen as a market-friendly choice. Deputy state secretary in charge of taxation Adam Balog has been named as a third deputy governor of the central bank.

Orban has called Matolcsy his “right hand” in the past and he had been the frontrunner for the top central bank job. The forint currency initially eased after the announcement but quickly recouped all of its losses.

The prospect of Matolcsy taking over the central bank has weakened the forint slightly in recent weeks, due to speculation that he would take aggressive action to pump more cash into a recession-stricken economy.

In late January, Matolcsy said the central bank had room to support growth, similar to central banks in developed economies such as the European Central Bank, the Federal Reserve or the Bank of England, but it must be cautious and conservative.

The central bank, with its interest rate policies now under the control of officials appointed by Fidesz’s parliament majority, made its seventh quarter-point cut in its base rate on Tuesday, bringing rates to 5.25 percent - matching the record low hit in April 2010 when Orban’s party swept to power.

ELECTION MODE

Since the last election, Fidesz has lost almost half its popular support. To keep power after next year’s vote, Orban needs to show crisis-weary Hungarians that the economy is finally moving out of the doldrums after a recession last year.

Outgoing bank chief Simor had been under mounting pressure from Fidesz to do more to support growth. Orban criticised his personal investments, calling him “an offshore knight”.

With yields low in financial markets elsewhere, Hungary successfully issued a dollar bond earlier this month. However, Hungary remains vulnerable to sudden shifts in global sentiment.

Analysts expect rate cuts to continue in coming months but said Matolcsy was unlikely to start his term with drastic unconventional measures at the bank.

“My sense is that in the very short term Matolcsy will be sensitive to market concerns - i.e. he will not want his entry into the job to be marked by a marked market sell off,” said Timothy Ash at Standard Bank.

“But further out, and perhaps later this year, if the economy continues to fail to fire and if support for the ruling Fidesz party lags in the run up to elections... I think it’s inevitable that the NBH under Matolcsy will reach for the unorthodox.”

Additional reporting by Sandor Peto; Editing by Peter Graff

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