* Room to cut rates limited, govt has no money for stimulus
* Signs that central bank will turn to monetary stimulus
* Buying of state development bank MFB bonds most likely
* Econ impact questionable, forint may react negatively
By Sandor Peto
BUDAPEST, March 24 (Reuters) - Hungary's government has not packed the central bank's policy council with its own nominees for no reason and the outcome now looks likely to be liquidity-based stimulus measures to boost economic growth.
Since the ruling Fidesz party gave itself the power to appoint a majority of the 7-strong panel, analysts have been confident that the new board would not outright slash interest rates to speed a recovery from the 2008 financial crisis.
Its new members have given signals in the past weeks of that sort of independent and moderate policy line -- in contrast to the government's outright criticism of higher rates.
But the Fidesz-appointed chairman of the bank's supervisory board Zsigmond Jarai raised again this week the idea that the bank could use the sort of stimulus employed in the United States and elsewhere to pump more cash into the economy.
That would most likely consist of the bank buying bonds issued by state development bank MFB, which could then lend money on, making loans cheaper for businesses to kickstart lacklustre lending.
It may be more of a coincidence that one of the four new members in the 7-strong panel, Ferenc Gerhardt, was the MFB's deputy chief executive post until his appointment this week.
"I think Jarai meant a mix of MFB support, bank regulation around fx loans and boosting lending from banks through further buying of mortgage bonds that the NBH did in a lacklustre way through last year," said Nomura analyst Peter Attard Montalto.
The bank has so far batted back suggestions from the government that it should buy MFB bonds in the secondary market, and raised its base rate by 75 basis points between November and January to 6 percent citing inflation risks. [ID:nLDE6851BF]
But the Fidesz government -- which said the rate hikes were unjustified -- has packed the rate-setting Council with its own appointees this month to corner Governor Andras Simor and his two deputies, who are now in a minority on the panel.
"The four new government-appointed MC members have eased market concerns that a politicized MC could quickly reverse recent interest rate increases," Barclays said in a note.
"However, the underlying tensions between the government and Governor Simor, whose term only expires in 2013, remain."
FEW OPTIONS
The government is struggling to boost growth and there is little fiscal wiggle room to pump money into the economy.
Economy Minister Gyorgy Matolcsy said last year that the NBH's policy was too conservative and it should buy corporate bonds in the market, primarily those of MFB, to help the government in its efforts to boost growth. [ID:nLDE6820OO]
The new rate setters might also want to reduce the NBH's reserves to help the government's drive to cut debt, but that is less likely as long as markets remain shaky, analysts said.
"Government bond buying by the NBH is also possible, but markets would immediately see that the only purpose is pushing yields (government interest rate costs) lower, and that could have a damaging market impact," said Zsolt Kondrat of MKB.
Hungary's market creditors have so far given it the benefit of the doubt over an unorthodox policy mix that has included levying big taxes on banks and other business sectors and renationalising the mandatory private pension pillar.
Any sort of liquidity injection risks a market backlash.
"Look what happened to the zloty when the Polish finance ministry did quantitative easing by the backdoor by receiving rates [ID:nLDE72D13R]," said Nomura's Montalto.
"(Monetary stimulus) would be negative to the forint."
BANKS RESISTANCE
MFB bond buying will still require the backing of commercial banks who have been burdened with Europe's highest bank tax and the government is in talks now with banks about a complex set of issues to end a moratorium on mortgage evictions by July 1.
Banks have huge free liquidity held in the NBH's two-week bills, totalling 4.267 trillion forints ($22.37 billion).
But they are risk-averse and reluctant to lend to companies even though demand for loans is rising [ID:nLDE71N0ZV].
A member of the Banking Association's presidency told Reuters he believed the NBH buying bonds of MFB would unnecessarily increase costs and risks undertaken by the state.
"The real solution is restoring the normal operation of the market as quickly as possible," Daniel Gyuris said. "Every one-off, drastic intervention increases risks."
The government first needs to agree with the banks to set up a state asset management firm and share losses on defaulted mortgage loans with borrowers and banks, which could reassure the banks and restore goodwill.
And above all, it needs to implement promised fiscal reforms fully, to ensure policy predictability and boost the economy.
"It must carry out the reforms pledged early this month without watering them up," said CIB Bank's Gyorgy Barta.
(Reporting by Sandor Peto; editing by Patrick Graham)