Orban Narrows Field for Next Hungarian Central Bank Governor

(Bloomberg) -- Hungarian Prime Minister Viktor Orban said he plans to combine the finance and economy portfolios and hinted that one of the ministers affected by the overhaul would become central bank governor.

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Orban’s comments, during a picnic with followers over the weekend, suggested that Finance Minister Mihaly Varga or Economy Minister Marton Nagy may succeed Governor Gyorgy Matolcsy after his mandate expires from March 1. The choice is being closely scrutinized by investors for the direction of Hungary’s economic policy.

The combination of the finance and economy portfolios will create the position of a “super ministry,” Orban said in comments on Facebook on Sunday. “One will be the top minister for the economy, the other will be central bank governor.”

The forint fell as much as 0.8% on Monday to 396.8 per euro, the weakest level in a month. Investors are on edge about Hungary’s trajectory in light of the looming changes in the top economic policy roles as well as questions about the commitment to rein in spending before what’s expected to be the tightest general election in 2026.

While Varga is seen by investors as a more restrained policymaker, he’s overseen successive years when the budget deficit overshot. Nagy, on the other hand, has favored interventionist policies both in government and in a previous role as a deputy central bank governor.

“Varga is seen as a technocrat, but the fact that the budget deficit exceeded 6% every single year since 2020 has put a mark on his record,” said Viktor Szabo, an emerging-market fund manager at Abrdn Plc in London. Nagy’s “creative but disruptive pro-growth policies don’t make him an ideal candidate to lead a central bank.”

The choice of who leads the combined ministry may offer clues about whether Orban will prioritize an expansionary economic policy until the next election or focus on reining in spending after government debt and interest payments soared.

Orban suggested he can do both, including overseeing a significant increase in the minimum wage that the premier’s main political rival, Peter Magyar, has pledged to double if he wins.

Orban said he’d hike wages and boost family subsidies in a bid to achieve economic growth of 3%-5% without hurting Hungary’s credit rating. Hungary is rated at or near the lowest investment grade category at all three major agencies.

Budget Shortfall

Bloomberg reported last week that Orban, who’s on track to face the toughest election in 2026 since his return to power 14 years ago, may eventually ditch his budget-consolidation plan to buoy the economy with higher spending, according to people familiar with the matter.

“The forint is now under renewed pressure due to media reports of a potential recalibration of fiscal balance expectations” toward a looser fiscal stance by the government, Citigroup Inc. strategist Luis Costa said in a note, recommending selling the Hungarian currency with a target level of 404 or 405 forint per euro.

The fiscal shortfall so far this year soared to 2.86 trillion forint ($8 billion) following another monthly budget deficit in August, the Finance Ministry said on Monday. The government is ready to take additional steps on top of some corporate tax hikes and delayed state investment to meet its targeted budget-deficit cuts, according to a statement.

Orban is relying heavily on Nagy for crafting economic policy, including for stimulating consumption and small- and medium-sized companies to boost the economy, which is at risk of sliding back into a recession after a contraction in the second quarter.

Hungary is seeking a “peace budget” for next year, one that will focus on helping families and small- and medium-sized companies, Nagy told Inforadio late Monday. He said the combined ministry Orban talked about won’t lead to a loosening of fiscal policy — and that the government will meet its budget deficit targets.

Investors are also closely watching the central bank succession plans after Matolcsy’s latest clash with Orban’s government, particularly over the persistent impact of record election spending from 2022. That fueled the fastest inflation in the European Union and had forced Hungary to tighten monetary policy more than anywhere else in the 27-member bloc.

While the central bank has since cut the key interest rate to 6.75% from 18%, it’s still the highest in the EU — and policymakers are cautious about the pace of further easing given fiscal-policy concerns as well as the volatility of the forint.

--With assistance from Marton Kasnyik.

(Updates with economy minister’s comment in third-to-last paragraph.)

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