Hungary Central Bank loses independence

I had pointed out to the interesting case study of Argentina’s central bank losing its independence. Then Plosser pointed that there are several such cases – Korea, Mexico, Japan etc. Even Fed has been accused by Taylor of conducting mondustrial policy.

Now there is another victim-  Hungary’s Central Bank. The Government has decided to now give teh Prime Minister powers to nominate 4 members of the seven member monetary policy committee. Earlier Prime Minister could nominate 2 members. The idea is current government wants to cut rates and by putting four government nominees. By putting four friendly members government could press its agenda:

Local news portal index.hu obtained a government document from a ministry that shows the cabinet intends to alter rules on the nomination of Monetary Council members. The government wants to achieve, via amending the Central Bank Act, to have a majority say in monetary policy by putting people loyal to the ruling Fidesz party on the MPC. 

The MPC comprises the Governor of the NBH, András Simor, two Deputy Governors, Júlia Király and Ferenc Karvalits and four “outside” members, Tamás Bánfi, Péter Bihari, Csaba Csáki and Judit Neményi who had been appointed for a six-year period and whose mandate expires in March 2011. The mandate of the former three expires in 2013. 

Under law, the MPC must have 5-7 members. Two new members may be nominated by Simor and two by PM Viktor Orbán, according to current regulations. All four of them need to be appointed by the President of the Republic, which is practically protocol; he could reject appointment only under very extraordinary circumstances.  

 Speculations are on who those four nominees would be. Meanwhile, the government has sent a letter to ECB asking it to respond. Knowing ECB, it would be aghast seeing these developments and might issue stern warning:

Economy Minister György Matolcsy confirmed today that the government plans to change the Central Bank Act to allow a parliamentary committee to appoint all four new rate setters in the MPC next year.  “We believe that now is the time as February 28 (2011) is approaching to put this in order and harmonise our central bank law with central bank laws of the European Union,” Reuters cited Matolcsy as telling a press conference today. 

“In this amendment we propose that, as is common in many European countries, a parliament committee, the economic committee shall appoint Monetary Council members, all four of them,” he added.  “Naturally, this amendment is not about the three internal members (the governor and his two deputies) … it affects no one holding a mandate right now.” 

The minister noted that the government has already sent a letter on the planned change to Jean-Claude Trichet, President of the European Central Bank and expects an answer from the ECB within 30 days. 

Here is a Bloomberg story. There is another interesting story of the fight between central bank chief and government. He refuses to resign despite pressures.

Central Bank Independence/Autonomy….huge victim of this crisis…

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One Response to “Hungary Central Bank loses independence”

  1. We Stop Foreclosure In San Diego | San Diego CA Homes and Real Estate – Independence Realty Says:

    […] Hungary Central Bank loses independence « Mostly Economics […]

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