Hungary passes central bank law (adds analysts, cbank comment)
Before the final vote lawmakers approved several changes to the bill to accommodate concerns raised by the European Central Bank (ECB), one being the passage on appointments to the rate-setting body, which itself will expand to nine members from seven under the new law, passed with 293 votes in favour, 4 against, and one abstention.
In his closing address to the parliamentary debate, Antal Rogan, head of parliament’s economic committee, said that “over 90 percent of the European bank’s proposals had been incorporated”.
The law coming into force on Jan. 1, 2012, forbids the government from attempting to influence the central bank or its leaders. Nor is it intended that the governor’s obligation to report to parliament should violate the independence of the bank’s decision makers, according to the law.
The rate-setting council will have broader powers, such as defining the scope of authority of the deputy governors, but the law does not affect the mandates of the two incumbent deputy heads of the central bank. It will be up to the prime minister, however, to make recommendations on future deputy-governor appointments instead of the central bank’s governor.
The law reinstates a directorate responsible for implementing the decisions of the Monetary Council and for overseeing the central bank’s operations. The directorate will comprise the bank’s governor and his deputies.
A transitional law passed on Friday opens up the possibility for a future merger of the financial watchdog PSZAF and the central bank.
Rogan said the government currently had no plans to carry out such a merger until Andras Simor completes his mandate as governor in 2013.
Financial analysts said after the law was adopted that any agreement with the IMF could be delayed to the second half of next year.
In a comment released to investors in London, JP Morgan noted that “several contentious elements were left unchanged”.
Having noted international pressure on Hungary, JP Morgan said it nevertheless expected “Hungary to conclude a precautionary Stand-By Arrangement, but a delay to the second quarter of 2012 now looks likely”.
It said the central bank was likely to raise rates further to stabilise the forint, although rate hikes alone, “unless very aggressive”, were unlikely to be sufficient to boost the forint “in the current environment”.
“We remain of the view that once Hungary secures a financial safety net, the NBH can begin to reverse its rate hikes and our end-2012 rate forecast remains unchanged at 6 percent,” JP Morgan’s London-based economists said.
“While we still attach a 65 percent probability of an IMF programme by [the second quarter of 2012], we think it will ultimately be the market that forces the government closer towards an IMF program”, they added.
The forint traded at 313.96 to the euro late Friday, weakening from 311.02 on Thursday, and was at 257.95 to the Swiss franc, softening from 255.34.
In an interview on public radio before the vote, Prime Minister Viktor Orban said that the government had accepted 13 of the 15 points of concern brought up by the ECB, and differences over the two remaining would be fought “in the framework of a legal procedure” if necessary.
A European Commission spokesman said on Friday that Brussels was still assessing Hungary’s response to European concerns over the country’s legislation.
Last week the Commission said that concerns raised by Barroso, as well as vice-presidents Olli Rehn and Viviane Reding, concerned matters of such importance that they required a thorough analysis, Brussels sources told MTI, adding that once that the analysis is completed the Commission will decide on what further steps to take.
On December 22 Orban said he had rejected Barroso’s request to withdraw two bills related to the country’s financial stability and the central bank.
Orban said that he told Barroso in his reply letter that it was not possible to delay the two draft laws because they were “important building blocks of the country’s new constitution which is to come into effect from January”. He added that neither law contained anything which the commission’s president had a right or authority to criticise.
Speaking on Hungarian public radio earlier today, Orban said that “we set our own goals, we meet those targets, and if somebody gives us good advice we will thank them, but if they make an attempt to divert us we will politely refuse.”
The National Bank of Hungary (NBH) on Friday said before the law passed that the new central-bank act would hurt the country’s interests. The bank said in a statement that legislation allowing a future merger of the NBH with financial market watchdog PSZAF would “endanger the stability of the Hungarian economy, thus seriously damaging domestic interests”.
It added that the new rules opened up the possibility for the government and political parties to influence central bank decisions, which goes against the European Union’s founding documents as well as international contracts Hungary has signed.
Besides the votes of the ruling Fidesz-Christian-Democrat alliance, lawmakers of radical nationalist party Jobbik voted in favour with one abstention. Lawmakers of the opposition Socialist party and LMP party left the chamber while many independents also boycotted the vote.
