Orban ally named as head of Hungary's central bank

Hungary's Prime Minister Viktor Orban on Friday named a close ally, the controversial Economy Minister Gyorgy Matolcsy, as the new head of the country's central bank (MNB), a move that had investors worried of resurging inflation and renewed instability.

"The new president of the central bank will be heard in parliament this afternoon: it is Gyorgy Matolcsy," Orban announced in his weekly interview on state MR1 radio.

The 57-year-old economy minister will replace Andras Simor, whose mandate ends on Saturday and whose six-year-term was marked by frequent clashes with Orban's government over state interference in monetary policy (IMF) and the bank's independence.

Minister without portfolio Mihaly Varga, who has been leading Hungary's negotiations with the International Monetary Fund (IMF) over a much-needed 15-billion-euro credit line ($19-billion), will meanwhile take over as economy minister, Orban said.

Matolcsy's nomination was widely forecast by analysts and financial markets, who have described the appointment as a "bad choice".

Investors worry that the new bank head will focus too much on getting Hungary out of recession and not enough on battling inflation.

Matolcsy is seen as something of an economic maverick behind many of the government's more "unorthodox" policies, like nationalising private pension funds and imposing "crisis taxes" on certain sectors, which have drawn fire at home and abroad.

His nomination will be interpreted by the markets as a takeover of the bank by Orban, analysts William Jackson and Neil Shearing at Capital Economics in London said.

The centre-right Fidesz-run government has come in for repeated criticism for its attempted encroachment on the bank's independence, including with new reforms last year, which caused IMF talks to break down and had to be ultimately revised.

In parliament on Thursday, Matolcsy stressed that the primary objective of the bank was to "achieve and maintain price stability".

He also said the MNB's foreign currency reserves would not be used "either for defending the economy, or development purposes".

In an interview with the Wall Street Journal last month, Matolcsy said the central bank should follow a European Central Bank-type policy mandate that sets inflation targeting as its primary goal.

The central bank should "absolutely not" engage in monetary financing and should be run in an "extremely cautious" manner, he added.

The new governor also said it would be a "huge mistake" to inject cheap central bank money into the banking system, unless it was done in a very well-targeted, conservative and cautious way.

The main goal of the central bank, following the European model, should be to bring inflation down to the 3.0-percent target, set by the EU.

"There should be no shock therapy from monetary policy, no surprises," he said.

Hungarian inflation stood in January at 3.7 percent, the lowest in 16 months.

Rumours that Matolcsy would be named as central bank head already sent Hungary's currency, the forint, falling in early February.

On Friday morning, it fell again to 296.30 forints to the euro from 295.40 forints before Orban's statement. It recovered to 295.60 by 0900 GMT.

Sandor Jobbagy, an analyst with CIB bank (part of the Sanpaolo Intesa group), said the moderate market reaction reflected the lack of surprise over the nomination.

Peter Duronelly of Budapest Alapkezelo (GE Capital) said: "The markets have already factored in Matolcsy".

Further cuts in the base interest rate can now be expected, from its current level of 5.25 percent to as low as 4.75 percent, Duronelly added.

The MNB cut the base interest rate this week by a quarter percentage point, the seventh such monthly cut in a row, in a bid to encourage economic growth.