Bloomberg News

Matolcsy to Focus on Growth, Inflation at Hungary Bank

March 01, 2013

Hungary's Finance Minister Gyorgy Matolcsy

Gyorgy Matolcsy, Hungary's finance minister. Under Matolcsy’s guidance, Hungary effectively nationalized privately managed pension-fund assets, forced banks to swallow exchange-rate losses on foreign-currency mortgages and enacted retroactive industry levies to close budget holes after the introduction of a flat personal-income tax. Photographer: Jock Fistick/Bloomberg

Gyorgy Matolcsy, the architect of Hungarian Prime Minister Viktor Orban’s self-styled unorthodox policies that helped push the economy into recession, vowed to focus on growth and fight inflation as central bank chief.

Matolcsy, who has urged the Magyar Nemzeti Bank to embrace unconventional monetary tools to stimulate the economy, will run the bank through 2019, Orban said on state radio today. Mihaly Varga, 48, who led talks with the International Monetary Fund, will replace him at the helm of the Economy Ministry.

Orban is shifting Matolcsy to the central bank as he faces elections next year and wants to jumpstart the economy after sacrificing growth to keep the budget gap within 3 percent of gross domestic product. Matolcsy, 57, engineered policies that compounded the effects of the euro-area crisis as Hungary slipped into its second recession in four years.

“The central bank can support the government’s economic policy and help achieve the aims of growth and employment if that doesn’t threaten price and financial stability,” Matolcsy told lawmakers during a hearing in Budapest today, without specifying the tools he may use.

The forint strengthened 0.3 percent to 294.55 per euro at 2:47 p.m. in Budapest today, rising the most since Feb. 25. The currency has lost 1.1 percent against the euro this year. The yield on the 10-year government bond fell 11 basis points to 6.22 percent. The benchmark BUX stock index dropped 0.5 percent to 18,722.47.

Policy Independence

Orban and Matolcsy spearheaded the government’s criticism of the central bank under outgoing President Andras Simor, drafting a central bank law that the European Central Bank said undermined monetary-policy independence before the Cabinet compromised to amend it. Simor’s mandate ends March 3.

Policy makers delivered seven consecutive quarter-point rate cuts, bringing the benchmark to 5.25 percent, matching the lowest on record. Simor and his two deputies have opposed the easing, citing inflation faster than the central bank’s 3 percent target and the limited impact on lending and economic output.

The new central bank leadership should “bravely” turn to “unorthodox” monetary-policy tools to create growth, including as many as 16 policies the ECB and the U.S. Federal Reserve used for stimulus while containing inflation, Matolcsy said Dec. 22, without elaborating.

Forint Reaction

The comments sparked a weakening of the forint to a seven- month low against the euro and prompted Commerzbank AG on Feb. 7 to call Matolcsy the currency’s “bogeyman.” Matolcsy’s ministry on Jan. 14 blamed Nouriel Roubini for the drop, saying it was triggered by a trading recommendation from Roubini Global Economics LLC.

Matolcsy later toned down his comments, saying the MNB should pursue “conservative” policy, avoid “surprises,” and “absolutely not” engage in budget financing, the Wall Street Journal reported Jan. 30.

That “has helped ease market concern,” Siddharth Kapoor, a strategist at Deutsche Bank AG in London, said in by e-mail today. “Ultimately, I think the government wants to ease policy and at the same time let the forint deteriorate in a controlled manner.”

Matolcsy may start with “more accepted” tools to stimulate the economy, including providing cheaper credit for new lending following the Bank of England, Zsolt Kondrat, an economist at Bayerische Landesbank’s MKB unit in Budapest, said by e-mail today.

‘Serious Risk’

“We don’t think this will produce significant results and therefore we see a serious risk that in the absence of an economic upswing the central bank will move to deploy more risky tools, pushing for excessively low interest rates, which may cause a drastic devaluation,” Kondrat said.

The MNB can trim its interest costs by reducing the benchmark rate, as long as it doesn’t undermine inflation- fighting efforts, Matolcsy wrote in response to a lawmaker’s question, the state-run MTI news service reported yesterday. Central bank reserves should only be used to guarantee stability, he wrote to another lawmaker.

The new MNB leadership may try to boost credit by offering funds to banks at preferential rates or limiting the amount commercial banks can hold in two-week deposits at the central bank, London-based Morgan Stanley (MS:US) economist Pasquale Diana said Feb. 25 after meeting officials in Budapest. Banks may also receive tax breaks from Europe’s highest bank levy to spur lending, Diana said.

‘Maneuvering Room’

There may also be “maneuvering room” on foreign-currency reserves as their level is “extraordinarily high,” ruling- party parliamentary leader Antal Rogan said Dec. 1.

Adam Balog, a deputy state secretary for tax issues in Matolcsy’s ministry, will also join the central bank as a third vice president. He also told lawmakers today that monetary policy can help growth if this doesn’t threaten its inflation target. He said he will make sure the staff is under “proper management.”

Boosting growth through monetary stimulus would damage the economy and the MNB’s credibility at a time when investments are plunging because of the government’s unpredictable policies, Simor said Jan. 17.

New Strategies

The financial crisis that followed the 2008 collapse of Lehman Brothers Holdings Inc. forced monetary authorities around the world to weigh fresh strategies to generate economic growth as nations run out of room to ease fiscal policy.

A proposal for central banks to adopt a target of nominal GDP, aired by BOE Governor-designate Mark Carney in December, was discussed on the sidelines of the Group of 20 finance ministers in Moscow last month, Russian official Ksenia Yudaeva said Feb. 21.

Matolcsy was the “least risky choice” for Hungary’s central bank president, Orban said today, adding that he wanted to nominate someone with government experience to the post.

The market “appears to have priced in” that Matolcsy will take over as central bank president next week, K&H Alapkezelo, the Budapest-based fund management unit of KBC Groep NV (KBC), which manages $3.5 billion, said Feb. 25. That, coupled with further rate cuts, may keep the forint near 300 per euro in the first half of the year, it said.

Simor was named central bank chief by Orban’s Socialist predecessor Ferenc Gyurcsany in 2007 and the two collaborated to negotiate an IMF bailout as the post-Lehman credit crunch engulfed the country.

Simor clashed with the administration that took office in 2010 over monetary policy. The Cabinet criticized him for not doing enough to stimulate growth, while the central bank has said government measures helped push the economy into recession.

Economic Policy

Under Matolcsy’s guidance, Hungary effectively nationalized privately managed pension-fund assets, forced banks to swallow exchange-rate losses on foreign-currency mortgages and enacted retroactive industry levies to close budget holes after the introduction of a flat personal-income tax.

The direction of economic policy won’t change under Varga, Orban said today, adding that he wanted to further reduce the single personal income tax rate to 10 percent, from 16 percent. The conditions are currently not appropriate for that step, Orban said.

A flood of global liquidity helped Hungary return to international debt markets on Feb. 12 after a near two-year absence, allowing Orban to break off talks with the IMF on a loan. The Washington-based lender had conditioned aid on the government adapting pro-growth policies, which the Cabinet rejected.

“This was an enormous coup, a real economic-policy turnaround,” Matolcsy wrote yesterday in the Heti Valasz weekly magazine, referring to Hungary’s success at narrowing the budget gap and averting the need to resort to IMF aid. “An era is coming to end for Hungarian economic policy at the beginning of 2013.”

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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