hungary

Claire Jones

Hungary’s new central bank act has led to outcry from the IMF, the European Central Bank, the European Commission and the National Bank of Hungary itself.

The act, rightly, is perceived as part of a broader power grab by prime minister Viktor Orbán from any institution or individual that serves as a check on government policy. It is also the latest in a series of attempts to undermine the current governor, András Simor.

However, some of the measures that the act proposes already apply to many of the major central banks.

It is not so much a case of what the act says, then. More what it signifies.

That highlights just how flimsy and susceptible to politicians’ whims central bank independence actually is. 

Two out of four ain’t bad. Ferenc Gerhardt and Andrea Bartfai-Mager are two government nominees for the central bank’s new policy board, under a new law that allows the government to appoint four rather than two of the seven-strong council. The law was sharply criticised by the ECB for potentially impacting on central bank independence.

Markets have welcomed the appointments, deemed “reasonable” by Elisabeth Andreew, chief currency strategist at Nordea. Analysts had worried the new government appointees would want to promote growth at the expense of fighting inflation; all three major agencies have cut Hungary’s government debt rating since November. The appointment of two former central bankers has reassured markets, as has their strong anti-inflation line at interviews today. 

**updated 18.49**
Hungary’s base rate remains at 6 per cent after three quarter-point rate rises in as many months. The decision to hold was widely expected. Prices in the year to December rose by 4.7 per cent, against a target of 3 per cent. But rates were raised on December 20 and January 24, both of which should work to bring inflation down in the coming months.

It is the final meeting of the monetary policy council in its current form. A legislative change has been approved by the Hungarian parliament, which will allow the Hungarian government to appoint four new central bankers, which some fear will lead to policy focused on growth rather than inflation.

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. 

High inflation expectations have nudged Hungary’s central bank to increase the base rate again. At a scheduled meeting, the central bank surprised markets by announcing a rise of 25bp to 5.75 per cent. The move is effective tomorrow, Tuesday December 21.

As with many countries, food prices have pushed prices up recently. Until a couple of months ago, inflation was falling in Hungary, above but toward the 3 per cent target from a recent high of 6.4 per cent in January. Now the CPI is at 4.2 per cent y-o-y, up from 3.7 per cent to August. 

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 Fed is buying more bonds; the ECB might even be considering it. But Hungary is throwing in the towel on its bond-buying programme, saying the plan has not made “significant progress” in easing long-term forint funding conditions for banks.

Hungary’s central bank introduced the bond-buying programme on February 8, 2010, intending to buy up to HUF 100bn to the end of this year. Purchases in the secondary market went broadly as planned, with HUF 30bn of nominal value bought and mortgage-government bond spreads declining from 150–200 basis points in 2009 to 80–150bp now. Purchases in the primary market, however, were “much smaller than expected”, at about HUF 7bn. 

Hungary’s credit rating is just one notch above junk since rating agency Moody’s cut two notches and warned of further downgrades. Concerns about fiscal sustainability led Moody’s to cut to Baa3, now in line with S&P. Fitch remains one notch above its peers, but is expected to cut by the end of the year. The cut places Hungary’s rating just a notch above that of Greece.

Last week, Hungary raised its key interest rate 25bp to 5.5 per cent to combat rising inflation expectations. It was the first rise since October 2008, and was largely unexpected by the markets.

Hungary’s forint is under pressure again and the consensus explanation is Monday’s comments by Hungary’s central bank, which analysts viewed as somewhat hawkish.

The National Bank of Hungary raised its average inflation forecast for 2011 and 2012 by half a percentage point (in part because of the weaker forint) and cut its 2011 economic growth by 0.4 percentage points to 2.8 per cent.

Added to the mix was a report in Hungarian newspaper Népszava that the new centre-right Fidesz government is still determined to get rid of central bank governor Andras Simor, whose monetary policy and personal finances have made him persona non grata