(Bloomberg) -- Hungarian Prime Minister Viktor Orban nominated his longtime finance minister Mihaly Varga to helm the central bank, with investors on alert for the potential loosening of monetary policy to boost the economy.
The premier lauded the soft-spoken, bespectacled 59-year old as the “most predictable and level-headed person.” But Varga will have to prove his independence as the government prepares to stimulate the economy ahead of the 2026 general elections. He will take over the National Bank of Hungary from March.
The forint gained 0.3% against the euro after the announcement, rebounding from a two-year low a day earlier. The change comes at a time when the economy is in a recession and doubts grow about how Orban will manage stimulus steps without crashing the cash-strapped budget. His ruling party trails a new opposition group in most polls.
“I can safely say that Mihaly Varga is Hungary’s most experienced economic policymaker and economist,” the prime minister said on state radio on Friday. Varga will succeed Governor Gyorgy Matolcsy, who has frequently criticized economic policy during his second and final term.
The measured Varga has been hard to parse for investors. He’s been a supporter of fiscal conservatism in successive Orban governments that have increasingly embraced freewheeling spending, especially after the Covid-19 pandemic. His influence waned as that of Economy Minister Marton Nagy, who’s backed heavy intervention in the economy and looser monetary policy, has surged.
The main question for markets is whether Varga as central bank governor will resist potential government pressure that may risk fueling inflation or destabilizing the currency.
“Varga’s career so far would indicate a prudent and cautious approach to central bank policy,” despite concerns that political loyalties may get in the way, said Zoltan Torok, head of research at Raiffeisen Bank in Budapest. “My expectation is that as central bank governor, Varga will subordinate political loyalty to professional considerations.”
Loyalty Test
Varga may soon find himself in the cross-hairs of the government that he’s loyally served.
The forint’s weakness has forced the central bank to halt monetary easing in recent months despite the ongoing recession and headline price-growth near the bank’s 3% target. At 6.5%, the key rate is tied with Romania for the highest level in the European Union.
In a HirTV interview on Monday, Nagy said the benchmark interest rate can “hopefully” be lowered as it’s currently running more than 3 percentage points above inflation, which he said was “not justifiable.” Nagy’s influence over economic policy may grow as Orban has earlier indicated he’d inherit Varga’s finance ministry, though the prime minister didn’t confirm that in his latest statement.
On Friday, Nagy, who has been locked in a standoff with the central bank over monetary policy for years, said Varga would be an ally in kickstarting the economy while maintaining financial stability, Index news website reported.
“Markets will be looking for any kind of comment from him on monetary policy,” Peter Virovacz, an economist at ING Bank in Hungary, said of Varga. “He will probably say all the right things, from inflation stability, which is the primary objective, to exchange rate stability, which is also important.”
Orban’s government has been looking for a more pliant central bank to help it foster growth with looser monetary policy. Matolcsy, whom Orban previously called his right hand man on economy policy, has over time become one of the fiercest critics of fiscal profligacy.
Matolcsy had blamed a loose budget policy, including record election spending two years ago, for almost causing a currency crisis in 2022 and for fueling inflation to the highest level in the EU in its aftermath.
Addressing investor concerns, Cabinet Minister Gergely Gulyas told reporters Thursday that the government will continue to guarantee the independence of the next central bank governor.
“Hungary’s post-pandemic fiscal track record doesn’t inspire confidence in Minister Varga’s ability to resist political pressures,” said Viktor Szabo, an emerging-market fund manager at Abrdn Plc in London. “This is unlikely to change” at the central bank.
(Updates with economist comment in 12th paragraph.)
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