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Zsigmond Járai, government critic, exits Hungary's Central Bank - extended

Hungarian Central Bank President Zsigmond Járai, who called economic policy „cancerous” and „chaotic,” today makes way for a replacement who may get embroiled in fewer conflicts with the government.

András Simor, head of the local Deloitte & Touche LLP's local office, was nominated by the government on February 16 to lead monetary policy. Járai was appointed in 2001 by Viktor Orbán, now leader of the opposition. Járai criticized the government for missing budget deficit targets year after year and ditching plans to adopt the euro in 2010.

While economists praised his stewardship of inflation and the forint's exchange rate, some said his comments damaged the bank's relations with the state. „He wasn't a bad central bank president, but the problem was that he became too political toward the end, which cost him his credibility,” said Nóra Szentiványi, an economist at JPMorgan Chase & Co. in London.

Prime Minister Ferenc Gyurcsány on February 20 said that having Simor leading monetary policy „greatly improved” the chances that the government and central bank can work together on a strategy for euro adoption. While easing the clash with the government, Simor, 52, may also be able to smooth tensions between board members, according to economists.


„Hopefully, this is a start of a new era,” said Chris Scicluna, an economist at Daiwa Securities in London. „It's helpful to have somebody who appears to be objective and rather more divorced from the political sphere. It tends not to be helpful to have a central bank governor explicitly undermining the government.” Járai, 55, last year said the government's fiscal policies were leading the country to the brink of a „heart attack.”

After Gyurcsány admitted spending was out of control and began cutting the budget deficit last year, Járai criticized the plan for relying too heavily on higher taxes. „This convergence program won't lead us to the euro, so sooner or later we will need a new program,” Járai told reporters on November 16. The euro is possible only „four years after a good, new convergence program is announced.” Hungary last year ran up the EU's widest budget deficit and has missed its targets for the shortfall every year since 2001. Járai's criticism was often correct, investors said.


„I think it was really justified,” said Raphael Marechal, who helps manage €2.4 billion ($3.2 billion) in emerging-market bonds at Fortis Investments in London. „The central bank would always like to see the government being more serious about budget execution, so that makes sense.” During Járai's term, the central bank abandoned the currency's crawling-peg devaluation and switched to an exchange-rate regime where the forint is allowed to rise or fall 15% from a fixed midpoint, similar to the mechanism used by euro adoption candidates. He also introduced an inflation targeting system, where the forecast deviation from a set goal guides monetary policy decisions.

Simor on February 16 said he „saw no reason” to abandon that system. Hungary's inflation rate during Járai's term fell from 10.8% in May 2001 to 2.3% in March 2003. Inflation accelerated to 7.8% in January because of regulated price increases and higher taxes aimed at narrowing the budget deficit. „We would want to see them continue the current policy of the central bank,” said Steven Gardyn, who helps manage €500 million ($657 million) of central European bonds at KBC Asset Management in Luxembourg.


The central bank has responded to accelerating inflation by raising interest rates five times between April and October last year and rates are now the EU's highest, along with Romania. Policy makers have since been divided over the inflation outlook, with rate decisions regularly coming with split votes. Járai and his deputies have argued for higher borrowing costs against the Monetary Council's majority, criticizing the decisions at times.

That antagonized policy makers and created tension within the central bank. „Járai has been incredibly strong with his opinion,” said Koon Chow, an emerging-market strategist at Barclays Capital. „The council has been polarized, with Járai and his deputies sitting at the hawkish end.” Járai has also criticized the government for amending the rate-setting council with outside members, which he saw as an infringement of central bank independence. „In 2001, Hungary got very close to real independence,” Járai said in a speech on January 19.

„After 2001 we took some steps backward when the central bank law was amended in a bad direction. Adding four new monetary policy members in 2004 was a clear step against independence.” A day after rate-setters on November 20 voted 7-5 to leave the key rate unchanged, Járai said he would have tilted the outcome the other way if possible. Other council members, including Gábor Oblath, responded publicly to the criticism within a week. (Bloomberg)