Changing of the guard at Hungarian Central Bank ends turbulent era
Changes at the helm of Hungary's central bank are likely to usher in a period of cooperation with the government after years of frosty relations that bordered on open warfare over monetary policy.
Andras Simor, until now chairman of the Hungarian subsidiary of global audit firm Deloitte Touche Tohmatsu, assumed the bank's presidency on Saturday, a day after the six-year mandate of his controversial predecessor Zsigmond Jarai ended.
Jarai, a former finance minister from the conservative Fidesz party now in opposition, became known for his stinging attacks on the Socialist-Liberal government's loose fiscal policy.
Analysts say Jarai's criticism was essentially on target, pointing to the country's public deficit of nearly 10 percent of gross domestic product last year, the highest in the European Union.
But they say Jarai's increasingly frequent and vitriolic verbal attacks ultimately dented his credibility by casting a shadow of political bias over his comments.
"The problem with Jarai is that the government clearly thought he was speaking for Fidesz and admittedly there were some comments which were hard to interpret any other way. The market also started to believe this," Zoltan Torok, an analyst at Raiffeisen Bank, told AFP.
"The government of course used this as an excuse to disregard Jarai's criticism, which was often well-founded," Torok said.
Jarai said Hungary was "one of the most vulnerable economies in the world," called the forint "one of the most vulnerable currencies in the world" and warned of impending "economic chaos."
After Socialist Prime Minister Ferenc Gyurcsany admitted the true extent of the public deficit, following his re-election last April, and announced an ambitious austerity package to reduce it, the forint strengthened against the euro, despite earlier fears it could go into a freefall.
"When someone cries 'Wolf!' all the time and the wolf doesn't come, people are going to stop believing that person," said Gyorgy Barcza, an analyst with ING Bank.
But he added: "Jarai may have sincerely believed that the economy would tank with such a high deficit and he probably felt he needed to convey this in no uncertain terms.
"He may have made a fool out of himself, but sometimes that's the job of a central bank chief."
Jarai's successor has now pledged a radical shift in communication.
"We must communicate in a very precise, well-founded, well thought out and moderate manner," Simor told business weekly Figyelo in his first in-depth interview in February.
He has also pledged cooperation with the government's new policy of fiscal discipline and has called the euro convergence programme, which maps out measures to bring the economy in line with eurozone requirements, "indispensable."
Jarai, on the other hand, has criticised the convergence programme, hailed by the market for imposing fiscal discipline and backed by the European Commission, saying the plan goes in the "wrong direction" and will "never lead to the euro."
The biggest conflict between the government and the bank was over interest rate policy, with the government often urging a looser monetary policy to help exports and lower the cost of servicing the country's debt.
Jarai pointed to the high public deficit and the bank's objective to keep inflation in check for keeping rates high, saying in a January 2004 television interview: "The more (the government attacks) the central bank, the higher the interest rate will be."
The government lost patience and in November 2004, parliament approved a law expanding the number of members in the bank's rate-setting monetary council and allowing the prime minister to pick up to five of them.
The central bank governor had previously appointed the whole council.
"The expansion of the monetary council was seen by the markets as an attempt to undermine central bank independence and interfere in monetary policy. But in the end, it did not lead to a significant loosening of monetary policy," Barcza said.
After Gyurcsany announced Simor's nomination last month, both men emphasised the importance of central bank independence.
They also pledged to work together to stabilise the economy and prepare it for adoption of the euro, forecast by analysts between 2011 and 2013.
AFP
