By Gergely Szakacs and Anita Komuves
BUDAPEST (Reuters) - Prime Minister Viktor Orban nominated Finance Minister Mihaly Varga as Hungary's next central bank governor on Friday, turning to an ally as he seeks to revive the economy before a 2026 election.
In power since 2010, Orban has struggled to revive Hungary from last year's inflation-led downturn, with the economy back in technical recession and falls in the forint putting on ice rate cuts from 6.5%, the highest in the European Union.
Some investors are concerned that an Orban-aligned majority of policymakers could lead to sharper rate cuts to boost growth before the election.
Varga was a lawmaker in Orban's Fidesz party after Hungary's first free elections in 1990 after decades of communist rule, and has served multiple terms as finance minister, including the period after the COVID-19 pandemic, when Hungary ran one of the highest budget deficits in the EU.
The 59-year-old economist, who has avoided open criticism of Orban's largesse, will succeed Gyorgy Matolcsy, Orban's former economic mastermind, who has become increasingly critical of the prime minister's policy course since a 2022 election.
Roger Mark, an analyst at fund manager Ninety One, said Varga was seen as cautious and conservative, but was clearly a loyalist to Orban, whose government has repeatedly put pressure on the bank to cut interest rates more sharply.
"If investors drove a sharp sell-off in the HUF (Hungarian forint) as a result, this would restoke inflation, which would be self-defeating for Orban and Fidesz," Mark said.
Varga, who will take over from Matolcsy in March, has said inflation should be the bank's top priority, but that it also needs to cooperate with the government on economic policy.
"It is difficult to believe that a new governor, whatever his mandate from Orban, would straight away ignore market signals and plunge the currency into a crisis," Commerzbank (ETR:CBKG) economist Tatha Ghose said.
"We might assume that the new governor would wait for a better external market environment to seek opportunistic rate cuts."
SLOW RECOVERY
The European Commission, the EU executive authority, expects Hungary's economy to expand by just 1.8% in 2025 after virtually no growth this year - the slowest pace in central Europe and a far cry from the 3.4% growth projected in Hungary's 2025 budget.
Some surveys show opposition challenger Peter Magyar's centre-right Tisza Party has caught up with Orban's right-wing Fidesz, signalling the 2026 election could be close.
Orban is looking to revive the economy with a housing boost, funds for small businesses, increases in wages and pensions and rises in family tax benefits to offset some of last year's inflation surge to the EU's highest levels.
Marton Nagy, Orban's economy minister, also expressed concern about large sums of cheap loans that the central bank provided to companies before the inflation surge and are now expiring, saying this should be handled by the next governor.
The National Bank of Hungary left its base rate steady in November after a sharp fall in the forint following Donald Trump's U.S. election triumph. His trade tariff plans could hit export-reliant central European economies, including Hungary.
The bank said its December inflation report would provide an assessment of the impact on next year's price growth, which the bank in September projected in a 2.7-3.6% range. That was before the latest wave of forint weakening.
Societe Generale (OTC:SCGLY) strategist Marek Drimal said the bank was likely to become somewhat more pro-growth under the new governor.
"But at the same time, it won't be anything that would totally overhaul the economy and monetary policy setting because they know that if they overdo it, the consequences could be quite harsh," he said.