Hungarian Parliament passes controversial Central Bank Act

The governing Fidesz majority of Hungarian Parliament has ruled that from now on, the National Bank of Hungary may get a government-appointed Vice Governor, the headcount of the rate-setting Monetary Council can be increased. Markets reacted negatively to the decision: the Budapest Stock Exchange index fell by 1.7% and the national currency also produced a loss against the major currencies.

Despite a number of modifications to make the draft more compliant with EU law, the European Central Bank as well as the National Bank of Hungary (NBH) have maintained concerns that the new Act of Parliament infringes on the institutional independence of the NBH.

Requested to be withdrawn by the European Commission but still approved and coming into effect as of January 1, the new law has undergone several modifications at the draft stage based on criticism by the Europan Central Bank.

However, after the modifications were approved, the ECB gave its opinion on the proposal once again, raising similar concerns as before. In the ECB's opinion, the new system of appointing Vice Governors and Monetary Council members raises the issue of governmental control over monetary policymaking.

Commenting on the issue of merging the State Financial Supervisory Authority with the National Bank of Hungary, the ECB emphasized that Hungary has repeatedly violated its obligation to consult the ECB, and the appointment of a new Vice Governor would conflict with the Statute of the European System of Central Banks.

The news sparked fears that the new legislation may prevent Hungary from receiving financial assistance from the International Monetary Fund and the EU, as the new Act of Parliament was one of the key stumbling blocks that eventually prompted the latter's delegation to walk away from talks with Hungary in mid-December.

Some analysts have raised the possibility of the government wanting to take control over the NBH’s substantial foreign currency reserves to finance its economic plans if talks with the EU and the IMF early scheduled for early 2012 fail. Both the EU and the IMF already warned the Hungarian government about the risks of its unorthodox methods and power concentration.