In exactly a week, Hungary’s MPC will meet for the final time before four of the seven policymakers retire. New legislation, which has yet to be approved by parliament, is likely to see the central bank governor stripped of his right to choose who fills two of those four seats. A deputy governor today urged parliament to respect the central bank’s independence and reconsider the legislation.
“The credibility of Hungarian economic and monetary policy would increase if political forces made clear their commitment to central bank independence (and) price stability,” Julia Kiraly said, according to Reuters news wire. “Predictable economic policy can lead to lower risk and lower funding costs, which will be felt by both the country as a whole and citizens servicing their debt,” she said.
Analysts worry that government influence at the Bank could lead to a pro-growth agenda, with too little attention given to fighting inflation. Hungary has been downgraded by all three main issuers since November of last year with government debt issues now rated BBB-/Baa3.
For what might be the last time in a long time, Hungary’s central bank has increased rates by 25bp. The third rise since November takes the rate on the key two-week bill to 6 per cent.
The rise was expected, partly as a result of inflation and partly politics. Inflation was 4.7 per cent in the year to December, considerably above the target of 3 per cent. Politics, because it’s assumed the MPC would want to raise rates before a significantly altered rate-setting committee takes over in March.
“The strongly increased risks of central banks may act as a constraint on the room for manoeuvre in future monetary policy.” That is the worst case scenario laid out by new research from the Bank of Finland. The thoughtful, comprehensive analysis of eight central banks looks at unconventional tools adopted during the crisis, concluding: “The actions by central banks during the crisis raise a number of questions concerning exit from the measures taken, the impact of the measures, central banks’ risks and independence and their governance structures.”
The turn of the year – and the final post on this blog for 2010 – make a summary of this paper seem appropriate. Which of the unconventional tools – if any – will be discarded in 2011?
One wonders why they asked. Hungary has again requested a legal opinion from the ECB on a draft law; the opinion is again highly critical; and once again the opinion is likely to be roundly ignored.
On July 1, Hungary’s Ministry of the National Economy asked the ECB for advice on plans to limit central banker pay; the ECB issued an opinion saying this was a bad idea; the Hungarian cabinet disputed the opinion and one week later they passed a law cutting the governor’s pay by 75 per cent, which became effective in September.
Some interpreted the ECB’s defence of Mr Simor’s exceptionally high pay* as cronyism. The ECB’s argument, however, focused on central bank independence. A country can’t join the euro, ran the opinion, unless its laws are compatible with those of the ECB:
The Hungarian cabinet has rejected the ECB’s opinion over a plan to cut central bankers’ pay, so the legislation will proceed to a vote next week.
The ECB feels the bill could compromise central bank independence. They argue the pay cut should only apply to successors of the current governor, Andras Simor, to allay concerns that the bill is intended to pressure current management. Adding to these fears will be the fact that the ruling Fidesz party has called for Mr Simor’s resignation.
The ECB has given a dressing down to the Hungarian government over plans to cut central bank salaries – and for failing to give the ECB enough notice to scrutinise the bill. A precedent was set a week ago, when the ECB scolded Romania for cutting its central bank staff salaries.
Two-thirds of the ECB’s strongly worded legal opinion reminded the Hungarian government about good time-keeping. The consulting authority, reads the document, may flag an issue as ‘urgent’ but “even in such cases a minimum one-month deadline applies”. Hungary apparently allowed less than three weeks for the process. The section ends: “The ECB would appreciate the Ministry for the National Economy giving due consideration to honouring its obligation to consult the ECB in the future.”
Price stability is a function of two things: a central bank’s power to refuse to buy government bonds, and whether a governor can be fired (without cause). These two variables “have all the predictive power for inflation associated with central bank independence,” said the BoE’s Adam Posen in a characteristically punchy speech yesterday.
This simple formula is quite shocking. Many common indicators of independence are omitted. Central bank mandates have little explanatory power. Neither does a bank’s technical independence from the political process; legislation, after all, can be ignored or rewritten. Topically, a central bank’s purchase of government bonds has no impact on inflation, according to Mr Posen, as long as the purchase was voluntary. Indeed, more harm than good may come from a bank obstinately refusing to enter the fray
Since global central banks widely expanded their roles in the financial crisis, their leaders have been warning about the dangers of attacks on their autonomy. Earlier this week, Ben Bernanke, US Federal Reserve chairman, said that undue interference can “impair inflation-fighting credibility” and “worsen the economy’s longer-term prospects”.
And over the past few months central bank leaders warned of attacks in Argentina (where the central bank chief was fired after refusing to transfer foreign exchange reserves to the government), South Korea (where a vice minister attended a monetary policy meeting), Japan (where the central bank faced pressure to increase lending) and Mexico (where some viewed the appointment process of the new Bank of Mexico governor as politicised).
New rules for Venezuela’s central bank will allow government use of ‘excess’ reserves, Bank financing of government-led projects, and a permanent seat on the Bank board for the Finance Minister.
Venezuela’s National Assembly approved changes in the rules governing the central bank to increase the government’s influence on the institution and to allow it to finance state projects.
Argentina’s expected co-operation with the government has been confirmed explicitly by the central bank president and the economy ministry. Bank president Mercedes Marco del Pont told reporters that the Banco Central will co-ordinate its policies with the country’s Economy Ministry, while economy minister Amado Boudou announced the formation of a new economic council, which will group officials from both institutions.
Focus at the central bank will be on company output rather than inflation, said Ms Marco del Pont: “We want to focus on price stability but from a different, non-orthodox view, from the supply side.” Annual inflation is running at 32.1 per cent, according to a report by Graciela Bevacqua, the former head of the consumer price department at the national statistics institute.