Hungarian Prime Minister Viktor Orban has proposed Finance Minister Mihaly Varga take over as  head of the Hungarian National Bank (MNB) from March 2025. The prime minister’s announcement on state radio on November 29 comes as little surprise as he had first signalled a cabinet reshuffle in September timed for the end of Gyorgy Matolcsy’s second mandate at the central bank. Varga had long been considered the frontrunner for the role by the markets.

Economy Minister Marton Nagy is to assume leadership of a new top ministry in charge of finance, economic policy and state development as the government is merging the  finance and economy ministries. The move also coincides with the launch of a new stimulus programme to give the economy a much-needed boost after the recession in 2023 and much weaker growth than anticipated in 2024.

"Varga is Hungary's most experienced economist and politician dealing with economic policy and from January 1, we will undoubtedly be working under a different economic management system," the prime minister added.

Varga, a 59-year-old Fidesz founder and an MP since the end of communism, served as finance minister from 2001 to 2002 and again from 2013. He is regarded as one of Orban's most loyal ministers.

The change at the helm of Hungary’s fiscal and monetary policy comes at a critical period as the economy has slipped into a technical recession in Q3 and the government is on track to overshoot the deficit target for the fourth consecutive year.

The suspension of EU funds further constrained fiscal leeway. In its latest credit review on Friday, Moody’s argued that the dispute with the EU and the weak German economy meant it had to change the country’s outlook from stable to negative.

The government faces the difficult task of stimulating growth while maintaining fiscal discipline, as it has vowed to bring the deficit below the 3% threshold in 2026, an election year.

While the finance minister has a reputation for being a cautious policymaker, he must navigate a delicate path between maintaining economic stability and meeting government expectations, analysts said.

There is also pressure on the new central bank leadership to help economic recovery by easing monetary conditions and reducing the highest real interest rates in the CEE region, which Nagy recently called excessive and unjustified.

MNB policymakers staunchly rejected attempts by government officials, including Nagy, a former deputy of the MNB, to pressure the bank to lower rates as the central bank seeks to shore up the forint at a time of escalating geopolitical risks.

The EUR/HUF pair traded in the 380-395 range for most of the year, but the trend line was broken in mid-October and now the forint is trading at a two-year low against the euro over 413, making it the worst-performing CEE currency in 2024 again.

Marton Nagy expressed confidence that Varga's appointment would ease the tense relationship between the government and the MNB. Many analysts attribute some of the heated disputes between the central bank and the government to personal conflicts between Nagy and his former boss, Matolcsy.

Financial website Portfolio.hu compiled market reactions, revealing more or less a consensus among analysts regarding Varga's potential approach to monetary policy. Most of them highlighted the challenge he faces in balancing market confidence with economic stability and political expectations.

Gabor Regos, an analyst at Granit Bank, does not foresee immediate changes to interest rates, projecting no cuts before autumn 2025. He attributed this outlook to current macroeconomic conditions and Varga’s historically cautious style. Regos emphasised that unjustified easing of monetary conditions could backfire, potentially undermining the stability of the forint.

Roger Mark of Ninety One Asset Management told Reuters that any indication of politically driven or inflationary monetary policy could result in a sharp depreciation of the forint. Meanwhile, Zoltan Torok of Raiffeisen Bank noted that while Varga's record suggests a balanced approach, uncertainty lingers over whether he will prioritise professional over political considerations.

Tatha Ghose, an economist at Commerzbank, argued that Varga is unlikely to disregard market signals immediately, as doing so could risk a forint crisis. Similarly, Peter Virovacz of ING Bank expects Varga to focus on price and currency stability, reassuring investors of the central bank’s independence and competence.

When Matolcsy, an Orban loyalist, left the economy ministry for the MNB governor position, there were concerns over the central bank's independence. However, these fears ultimately proved unfounded.

In recent years, Matolcsy has become an outspoken critic of government policies, condemning measures such as price caps and rate freezes as market-distorting. He also clashed with Orban over economic policy, as he opposed the influx of investments into battery manufacturing, instead of prioritising investments in knowledge-intensive industries.

A day before the prime minister announced his choice for MNB governor, Gergely Gulyas, head of the Prime Minister’s Office, reassured markets during a government briefing that the central bank’s independence would remain intact.

There are also question marks concerning the composition of the new top ministry spearheaded by Nagy, and how he will manage to maintain fiscal austerity and boost growth at the same time. This comes as Hungary is under an EU Excessive Deficit Procedure for exceeding fiscal targets since the pandemic. The nominee for the new state secretary for the budget will also be scrutinised by the markets.

Nagy, in charge of fiscal policy from March, will have to stick to the deficit targets set by his predecessor, analysts noted. The 2025 budget assumes a deficit target of 3.7% and a 2.9% shortfall in 2026 to align with the Maastricht rules. 

The national economy minister at a recent conference called for temporary relief from the Maastricht criteria for investments to finance the green and digital transition. He argues that strict fiscal rules in the EU are to blame for the continent falling behind China and the United States in competitiveness, innovation and digitalisation.