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FT: Bank governor attacks Budapest ‘pressure’

Hungary’s central bank governor has accused the government of exerting “blatant political pressure” in at attempt to erode the institution’s independence, the Financial Times wrote on Monday. Andras Simor, governor since 2007, said constant criticism from the government of Viktor Orban, prime minister, was complicating the task of controlling inflation.

Hungary’s central bank governor has accused the government of exerting “blatant political pressure” in at attempt to erode the institution’s independence, the Financial Times wrote on Monday. Andras Simor, governor since 2007, said constant criticism from the government of Viktor Orban, prime minister, was complicating the task of controlling inflation.

Simor said three quarter-point interest rate rises since November – when Hungary became the first central European country to start monetary tightening since the financial crisis – were justified by price pressures and were not an attempt to assert the bank's autonomy, the FT reported.

The clash between Budapest’s government and central bank could foreshadow similar difficulties elsewhere in Europe as inflationary pressures rise along with oil and food prices, according to the FT. Orban and Fidesz officials have hinted that they favor lower interest rates to stimulate growth. Under draft government proposals, four new members of the bank’s seven-person monetary committee to be appointed from March would be chosen by parliament – rather than two previously – leading to speculation that policy could become more dovish.

Simor stressed that the increase in base rates to 6 per cent was not politically motivated. “It shouldn’t surprise anybody that if a monetary policy council gets . . . an inflation report which shows inflation above target for the full forecast horizon then it doesn’t really have much option . . . other than tightening monetary conditions,” he said. Hungary’s headline inflation rate hit 4.7 per cent in December, up from 4.2 per cent in November. The bank’s target is 3 per cent.

Simor also countered the idea that a revamped monetary council would be susceptible to political pressure. “I can only start from an assumption that whoever the members will be, they will do their job in accordance with what is prescribed in the law,” he said. “Whoever sits here will have to abide by the goals of this bank.”

In what analysts might interpret as a sign that Hungary is nearing the peak of tightening,  Simor noted that the “fine balance” in the latest rate vote last week "indicates that there are strong opinions on both sides”. But he warned that criticism of each rate rise by Hungary’s economy ministry risked blunting the bank’s instruments.

“These comments create the environment that monetary policy needs to be even stricter,” he said. “Because with smaller steps you’re not achieving the result if somebody creates the perception that this might be reversed.”

Simor joked that his job had recently “not been the dream of my life”, but insisted that he would serve out his full six-year term. The principle of central bank independence had “not sunk in generally” with politicians in Hungary. “Resignation of a central bank governor might suggest to any future government that they can force the . . . governor out if they don’t like what he is doing,” he added.