MNI INTERVIEW2: New NBH Chief Must Clarify Reaction Function
MNI (LONDON) - The National Bank of Hungary’s new governor will bring a “cool head” and strong understanding of monetary policy, but will need to clarify the central bank’s reaction function, a former senior NBH advisor told MNI.
“I’ve known Mihaly Varga for a long time,” Istvan Szekely said in an interview. “He is well-versed in macroeconomic policymaking. He is widely regarded as a safe pair of hands. He is calm and cool-headed, with a leadership style that fits central banking culture.”
Varga, who announced in December his intention to add state secretary Peter Beno Banai, debt management agency (AKK) chief Zoltan Kurali, and Hungarian Development Bank (MFB) CEO Levente Sipos-Tompa to the NBH’s staff, will lean on a circle of well-trusted colleagues, Szekely said, but will have no problem with current central bank staff “telling him the truth, and there are very good staff within the MNB that can do this.”
Varga’s arrival will improve relations between fiscal and monetary authorities, after an extended period when poor communication led to an increase in Hungary’s risk premium, said Szekely, who served first as Research Director then Director and Advisor to the Governor from 1996-1999, before taking on a variety of senior roles at both the IMF and the European Commission.
“The most notable difference will be what is made open and what will be kept behind closed doors. When I worked in the central bank, there were frequent meetings between the finance minister and the governor with their staff, and those were truth-telling meetings, but behind closed doors. Frank and constructive discussions are absolutely necessary because these institutions have different positions, different situations, and different goals.” (See MNI POLICY: NBH March Projections Key To Policy Outlook)
CENTRAL BANK INDEPENDENCE
At a time when PM Viktor Orban faces his strongest electoral challenge in 15 years, the statutory length of Varga’s term - six years -should also protect the central bank’s independence, Szekely said.
“The Bank has its own very strong institutional culture and clearly defined goals. Of course, one has to face the government, the media, the unions, etc., but there is enormous freedom as well as enormous disciplining power, both from the law - which is clear - and from within. I don’t see there being any issues. And, of course, his term goes beyond the general elections next year, and it is far from clear what sort of government we will have afterwards.”
Incoming data indicates a further deterioration in the near-term price outlook, so, barring any shocks, it would be appropriate to leave the base rate at 6.5% at least until March, Szekely said.
However, with the exchange rate still seen as the clearest indicator of where prices are headed, household inflation expectations - a key driver of wage growth and savings rates - are unlikely to fall any time soon, he said.
“What remains somewhat unclear is the Central Bank's reaction function. What are the most important elements from the MNB's perspective, and how do they weigh them? How will the incoming governor read the numbers?” he said.
“At present, we're locked into a monetary policy with a real interest rate of 2.5- 3.0%, which, for an economy that is just coming out of a recession and still has a sizable output gap, is clearly too high. That's where, for the central bank, the bind is: a monetary policy that must remain restrictive and a fiscal stance that is turning expansive.”