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. Read more

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. Read more

**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. Read more

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. Read more

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. Read more

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: Read more

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. Read more

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 grataRead more

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 resignationRead more

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.” Read more

Irish unemployment rose to 13.3 per cent in May, the highest rise among the 30 countries reported by Eurostat in its monthly unemployment bulletin. The previous rate, in April, was 12.9 per cent.

Hungarians, by contrast, recorded the greatest drop in unemployed, with 10.4 per cent, down from 10.9 per cent last month. Overall, six countries reported increasing unemployment, 10 recorded falling unemployment, and 14 remained static. Latvia, Spain and Estonia are still at the top of the European league with almost one in five of their labur force out of work, although two of these have not yet recorded up-to-date May figures. Read more

If rumour is true, things are looking up for the 100,000 Hungarians more than 90 days past their mortgage due date. What’s left of Hungary’s international loan may end up in a mortgage-relief fund, intended to allow people to rent their homes, reports Reuters.

The new fund – reported in daily Magyar Hirlap and not yet confirmed by officials -  would buy property (that would otherwise stand to be repossessed) from commercial banks, allowing mortgage-holders to rent the property. The paper also said that the bad loans of households would be replaced by state loans, though it did not name a source. Read more

Ralph Atkins

The European Central Bank is being worryingly opaque – even by its own standards – about the enhanced role it is playing across Europe, including beyond the eurozone’s eastern border. It is now an open secret in financial markets that the ECB has established currency swap arrangements with the Polish and Hungarian central banks, making it easier for its counterparts in Warsaw and Budapest to provide euros locally. Yet, if you ask the ECB, it refuses to comment.

Such behaviour seems bizarre – and could be counter-productive. Read more

Romania and Hungary cut interest rates to record lows on Monday as central bankers looked to support growth following improved investor risk perception in central and eastern Europe.

The National Bank of Romania lowered its monetary policy rate from 7 per cent to 6.5 per cent, while the Magyar Nemzeti Bank in Budapest trimmed the base rate from 5.75 per cent to 5.5 per cent, the lowest since the fall of communism.

Romanian and Hungarian currencies have strengthened in recent weeks and it has become cheaper to insure against the risk of their debt defaulting, as investors bet that eastern Europe is gradually overcoming the worst of the financial crisis. Greek banks hold significant assets in Romania, but so far contagion risks appear benign. Read more

Eurozone and EU-wide unemployment have stayed at their record December highs of 9.9 and 9.5 per cent, respectively.

Looking at the by-country data is instructive. With inflation data released at the end of last week, we thought a Phillips curve might be in order: Read more

The Hungarian central bank governor has cut the base rate from 6 to 5.75 per cent, effective today. The move was expected, and a further cut is seen as likely before easing stops. Rates were last cut 25bp on January 25.

Hungarians will be borrowing more forints and less euros under one of several new initiatives planned by the country’s central bank.

Interest rates are typically higher on forint-denominated mortgages than, for instance, their euro counterparts. But spreads have been narrowing and the central bank plans to reduce them further. The Magyar Nemzeti Bank will buy forint-denominated mortgage notes up to a maximum face value of 100bn forint ($500m). Read more

Hungary’s central bank decided today to lower its base rate by 25 basis points to 6 per cent. The decision was in line with market expectations and weighed brightening inflation prospects against external risks such as Greek and Irish debt. The rate was also cut by 25bp in December. The new overnight central bank deposit rate is 5 per cent and overnight collateralised loan rate is 7 per cent.