András Simor's appointment to head Hungary's central bank will mean a more dovish but still pragmatic monetary council, a major City-based investment bank said in a report released on Friday.
Barclays Capital, the investment arm of Barclays, the third biggest UK-based corporate and retail banking group, said its conclusions are based on its understanding of Simor as a pragmatic individual and the anticipated tilt to dovishness in the MC will result from the exit of hawkish officials rather than from the installation of a new set of doves. After the top-out of CPI inflation, „we think the Hungarian MC could be aggressive in cutting interest rates, particularly following the personnel changes”. Simor had „no big run-ins with the previous centre-right Fidesz government” during his term as chairman of the Budapest Stock Exchange between 1998 and 2002, which may mean „he doesn't have strong political affiliations though obviously he is likely to be friendly to the current government, given that it appointed him”, Barclays Capital said. This view echoes similar predictions by other London-based emerging markets analysts. Dwyfor Evans, Vice President for emerging markets strategy at Bank of America, told Econews on the day the nomination was announced that Simor is going to be significantly less critical of government policy than Zsigmond Járai, the outgoing president, and that the „often acrimonious relationship” between the government and the central bank „could moderate somewhat”. Goldman Sachs also said after the announcement that it expects the NBH's relationship with the government to be better than under Simor's predecessor.
Barclays Capital said that during a recent research trip to Hungary Simor was described by a number of local analysts as being a good managerial type with solid banking sector experience. „We think as governor, Mr Simor could help build a consensus in the MC, minimising any big swings in monetary policy in the future”, it added. Barclays Capital said its baseline scenario is for a pragmatic new governor and two similarly minded deputy governors, one of which will sit on the MC along with Simor. „But this would still mean a less hawkish/more dovish slant to monetary policy given that they replace MC members that are staunch hawks”. The MC will be smaller, thus complicating the net hawk-dove balance in the council. But it is important that „a unified hawkish front” comprising four senior MC officials will be replaced by two pragmatic officials, the report stressed. Barclays Capital developed a hawk/dove scoring system, based on the MC members' voting since the beginning of the 2006 tightening cycle. Any vote supporting a 25bp hike earned a score of 1 for the decision, while votes for rates unchanged received 0. Looking at the scoreboard, outgoing Governor Zsigmond Járai and deputy governors Henrik Auth and Péter Adamecz were the most hawkish MC members, with the former two scoring 8, and Adamecz 7 points. Deputy Governor Szapary's score is 6, with the average score being 5. „We think the personnel changes makes the MC more dovish, but it will still be a pragmatic council ... we think the next interest rates move will still be down, given that the economy is slowing on the back of the government's fiscal austerity measures”. The cyclical slowdown will eventually rein in inflation growth and the May CPI 2007 data should mark the top of the cycle. When CPI growth tops out, last year's interest rate hikes can be reversed and the newly restructured MC could vote through a deeper set of interest rate cuts than the MC with the previous set of governors. „We think the forint will be stable for much of this year at around 250 per euro, supported by a rise in FDI and fall of the current account deficit”, Barclays Capital said. (Bloomberg)