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BUDAPEST (Reuters) - Prime Minister Viktor Orban tightened his grip over Hungary's economy on Friday, naming his "right hand" to take over the central bank from an arch rival who tried to resist his government's unorthodox policy campaign.
Orban's naming of Economy Minister Gyorgy Matolcsy to head the central bank follows an overhaul of the constitution and other moves that gave his ruling Fidesz party firmer control over the bank, media and courts, to the worry of Brussels which fears Hungary is sliding out of the European mainstream.
The architect of Orban's pro-growth economic policies, Matolcsy has imposed Europe's highest bank tax and nationalised billions of dollars in private pension assets, unnerving foreign investors and contributing to the collapse of loan talks with the IMF and EU last year.
He replaces Andras Simor, whom Orban's government tried to force out after it took power in 2010 by slashing his pay by 75 percent. Matolcsy's six-year term means he will control the National Bank of Hungary even beyond elections next year.
"Matolcsy is something of a bull in china shop as far as markets are concerned," said Nicholas Spiro, head of London-based Spiro Sovereign Strategy.
"Make no mistake about it, his appointment ranks as one of, if not the most, controversial in the world of central banking."
A 57-year-old economist, Matolcsy has lashed out at banks and foreign companies for launching attacks against the government and betting against the "junk"-rated assets of central Europe's most indebted country.
The prospect of Matolcsy taking over the central bank has weakened the forint slightly in recent weeks, due to speculation that he would take aggressive action to pump more cash into a recession-stricken economy.
The bank had already been slashing interest rates in recent months despite the objections of Simor, who was outvoted by officials named by Fidesz's majority in parliament.
The forint currency initially eased after Friday's announcement but quickly recouped all of its losses.
Matolcsy's approach is lock-step with that of Orban, who has eschewed traditional austerity in a bid to pull Hungary out of economic stagnation and has long campaigned about the need for country of 10 million to regain its "economic sovereignty".
On Friday, Orban said the bank was independent and declined to comment on what it should do under new management. But he stressed the need for harmony with the government.
"Some of the tools needed for economic growth are government tools that the Economy Minister uses, while other tools are at the central bank, its governor and the Monetary Council," he said. "These must be in some form of harmony for a country to perform well."
The appointment comes as Fidesz tries to rebuild its popular support, which has dropped by almost half to around 25 percent in opinion polls since the 2010 election.
Orban needs to show crisis-weary Hungarians that the economy is finally moving out of the doldrums after a recession last year and has planned a string of measures to boost growth.
Ignoring the reservations of its outgoing governor Simor, the bank made its seventh quarter-point cut in its base rate on Tuesday, bringing rates to 5.25 percent and matching the record low hit in April 2010 when Orban swept to power.
So far, the rate cuts have not forced investor flight, with the historically low interest rates in developed countries keeping up appetite for higher-yielding assets. Budapest also issued a successful dollar bond earlier this month.
But because of its high debt of around 80 percent of GDP, Hungary is the region's most exposed economy to sudden shifts in sentiment.
"It is difficult to conceive of a less market-friendly candidate than Dr. Matolcsy to take over at the helm of the National Bank," Neil Shearing, an economist at London-based Capital Economics, said in a report.
"This is likely to erode the central bank's independence and the credibility of policymaking, and thus increase the risk premia on Hungarian assets."
Outgoing bank chief Simor had been under mounting pressure from Fidesz to do more to support growth. Orban criticised his personal investments, calling him "an offshore knight", drawing fire from Brussels for interfering with the bank's independence.
Appointed by a Socialist government in 2007, Simor had opposed Orban's desire for looser monetary policy to spur recovery ahead of elections in 2014. One of Simor's deputies, Ferenc Karvalits, will also leave the bank at the end of March.
To replace Matolcsy as economy minister, Orban tapped former finance minister Mihaly Varga, a close ally seen as a market-friendly choice. Deputy state secretary in charge of taxation Adam Balog was picked as a third deputy central bank governor.
In late January, Matolcsy said the central bank had room to support growth, similar to central banks in developed economies such as the European Central Bank, the Federal Reserve or the Bank of England, but it must be cautious and conservative.
Analysts expect rate cuts to continue in coming months but said Matolcsy was unlikely to start his term with drastic unconventional measures at the bank.
"My sense is that in the very short term Matolcsy will be sensitive to market concerns - i.e. he will not want his entry into the job to be marked by a marked market sell off," said Timothy Ash at Standard Bank.
Writing by Krisztin Than and Michael Winfrey; Editing by Peter Graff