Hungary Passes Controversial Central Bank Law

BBC, 12-30-2011

Hungary has passed a law that critics say could undermine the independence of its central bank.

The ruling Fidesz party, which has a two-thirds majority, has approved the constitutional change in the final session of parliament this year.

Ratings agency Standard & Poor’s downgraded Hungary’s debt to junk status last week, partly due to the proposed changes to the constitution.

EU and IMF officials have cut short aid talks with Hungary over to the law.

Hungary had been seeking a standby credit line of 15-20bn euros ($19.5bn, £12.6bn) in case it ran into trouble issuing new debt.

But the International Monetary Fund and the European Commission have both cast doubts over aid because of the law.

On Thursday, Hungary abandoned part of a planned bond auction, when investors demanded a higher interest rate on the debt the country planned to issue.

Hungary’s central bank governor, Andras Simor, has said the bill amounts to a takeover of the central bank.

The law has also been criticised by the European Central Bank, who said it raised “concern as to whether [it] could be used to influence the decision-making process, to the detriment of central bank independence”.

International pressure

The government wants to keep interest rates low to boost growth – but last week, Hungary’s central bank increased rates for the the second month in a row, to 7% from 6.5%.

Consumer prices inflation in Hungary is currently running at 4.25%, well above the official 3% target.

“Some amendments have been made since the original draft was presented before the Christmas holiday, but concerns remain that the essence of the law has not changed,” said the BBC’s Eastern Europe reporter Nick Thorpe.

“The reform of the bank would introduce deputy governors and allow the government greater potential influence over key aspects of monetary policy, such as the level of interest rates.”

Hungary was given a 20bn-euro standby loan by the IMF in 2008 to prevent it having to default on its debts.

But the newly-elected Prime Minister Viktor Orban decided not to renew the standby facility last year.

Standard & Poor’s has cited heightened risks to the country’s ability to repay its debts due to the weakening domestic and global economic outlook.

“In our view, the predictability of Hungary’s policy framework continues to weaken, harming Hungary’s medium-term growth prospects,” S&P said.

Last month, fellow ratings agency Moody’s also downgraded Hungary to junk status, blaming the economy’s high levels of debt and weak prospects for growth.

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