Central Bank Independence Is Under Threat


By Paula Green

As if a weakening currency, surging public debt and three downgrades to junk bond status since November weren’t enough to dissuade investors from sinking money into Hungary, they now have to deal with a prime minister intent on undermining the independence of the central bank’s monetary policy.

300 Regulars 04-Milestones-3

Public protesters in Hungary march against government policies

Photo Credit: posztos ( colorlab.hu ) / Shutterstock.com

Hungarian prime minister Viktor Orbán used his majority in parliament to push through an onerous central bank law. It opened up the possibility of changes to the bank’s crucial monetary council, which sets interest rates, and gave the prime minister the right to name three central bank vice presidents. Previously, the bank chief had nominated his two deputies.

A separate law could lead to the bank’s eventual merger with a financial regulatory agency, which would effectively end up demoting the central bank chief. The current term of central bank president András Simor ends in early 2013.

In a statement released before parliament’s vote on the law in late December, the central bank said the changes endangered the stability of the Central European nation’s economy.

The law, which took effect with the new year, has also upset officials in Washington and Brussels while sparking public protests. Hungarians were already outraged by the Orbán government’s move to nationalize about $13 billion in private pension fund assets. Voters were unhappy with the previous socialist government that implemented austerity measures in 2006 and accepted an IMF bailout two years later.

Though he pledged to end the austerity imposed by the IMF, Orbán was forced to raise taxes, cut social spending and eliminate early retirement. He has now reined in his nationalistic rhetoric, in an attempt to gain international aid and revive Hungary’s ailing economy.