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“So as widely expected Matolcsy moves from the Ministry of National Economy to replace Simor at the MNB, with Varga replacing him.”

That was how Peter Attard Montalto of Nomura put Friday’s news in his morning email.

Hungarians tended to be more terse.

“Serious times to come for us with MGY…” said one email to beyondbrics from a Hungarian banker. “So it is Matolcsy. God save the forint!” went another from a Hungarian economist, self-exiled in London.

Strangely, prime minister Viktor Orbán himself seemed less than wholeheartedly enthusiastic about his choice:

“I have made my decision. The new central bank governor is going to be György Matolcsy. This is the least risky decision,” he said in his weekly radio address.

He continued (as translated by Reuters):

“It is not the first time I have nominated a central bank governor. Once before, as fate had it, I had to solve a task like this, back in 2001. Even then I thought a lot about what the country needs. Then I arrived at the decision – and I still think so – that the governor of the central bank must be a person with government experience. Back then Zsigmond Jarai was finance minister. I asked him, he accepted the job, and he performed superbly.”

Things were different then, of course. Orbán took power in 1998 with the economy humming along at 4 per cent annual growth after reforms put in by the outgoing Socialist administration.

But back to the present.

“I am convinced that – because the central bank is independent and that cannot be questioned – there is only one opportunity to ensure the central bank is able to fit its work within the whole of our economic policy. This is only possible if we nominate for central bank governor someone who has seen government work from up close, who has experience doing and leading that work. Stability and predictability will occur if we nominate a person with government experience.”

Sadly, the past 34 months of economic rule under Orbán-Matolcsy have been characterised by instability and unpredictability, as one set of badly-drafted tax or financial regulations, compiled without consultation, has been heaped upon another.

Matolcsy is widely expected to ease monetary policy still further and give banks incentives to lend more in a bid to boost Hungary’s ailing economy, which contracted 1.7 per cent last year.

More immediately, all eyes and ears are waiting to see what Matolcsy tells a parliamentary committee at 14.00 local time on Friday about his vision for running the bank. This from Montalto at Nomura:

Of course he is not going to say “I’m going to undertake a devaluation of the currency” but he has been known to be blunt on his views before. That said a lack of any major unorthodoxies at this stage will probably cause further firming in HUF as the market wrongly interprets what is going to occur.

After the uncertainty on markets in the lead up to Matolcsy’s appointment, the chances are that caution will prevail in his first weeks, says Nicholas Spiro, managing director of Spiro Sovereign Strategy.

“The market had already been pricing in the implications of a Matolcsy-led central bank, with the forint weakening noticeably over the past month and bond yields backing up a tad of late. Given that the last thing the Orbán government wants right now is a sharp deterioration in sentiment towards Hungary, the new regime at the MNB will be under considerable pressure to act responsibly,” Spiro told beyondbrics.

However, Mujtaba Rahman at Eurasia Group in New York is more aligned with local Magyars in his view of what it all means.

“The nomination of Matolcsy to the central bank further deteriorates the outlook for the Hungarian economy. Not only has he completely destroyed government credibility on fiscal policy, but he now risks doing the same on the monetary policy side, too,” he told beyondbrics.

This almost certainly means lower interest rates and a weaker exchange rate, “irrespective of the inflationary and fiscal implications both would carry,” he says.

What was that about stability and predictability again?

Related reading:
Matolcsy: Hungary’s finance minister, conspiracy theorist, and central banker? beyondbrics
Hungary’s GDP: stuck in reverse, beyondbrics
Hungarian bonds: betting on Orbán, beyondbrics
Hungary’s ‘catastrophic’ minister, beyondbrics