Hungarian Government's Attacks on Central Bank `Prone to Fail,' Simor Says

Hungary’s new government, which has called on the central bank’s leadership to quit, should give up its “attacks” which are “dangerous” and “prone to fail,” Magyar Nemzeti Bank President Andras Simor said.

Prime Minister Viktor Orban’s efforts to reduce salaries at the central bank violate the institution’s independence, Simor told reporters today after the central bank left the benchmark two-week deposit rate unchanged at 5.25 percent.

Orban, who swept to power in April elections, has called on Simor, his two deputies and the four outside members of the rate-setting Monetary Council to resign for policy mistakes, and in Simor’s case, for having held investments in Cyprus. Simor has rejected demands to quit before his term expires in 2013.

“Political propositions attacking” the central bank’s independence “are dangerous and prone to fail,” Simor said. “Every political attack has a price and the citizens are the ones who have to pick up the tab.”

The intensifying battle over the central bank comes after Orban abandoned attempts to convince international creditors to allow his Cabinet to raise the budget-deficit target for this year, following a selloff in the forint, stocks and bonds.

‘Significant Worsening’

Comparisons of the country’s finances with Greece’s by Hungarian ruling-party officials earlier this month caused a “significant worsening” in Hungary’s risk profile, the rate- setting council said today in a statement. The council urged the government to detail fiscal proposals “as soon as possible” on how it will meet this year’s creditor-approved budget deficit target of 3.8 percent of gross domestic product.

“Ongoing tensions mean that investors will remain nervy and Hungarian markets will stay susceptible to further selloffs,” London-based Neil Shearing and David Oxley of Capital Economics Ltd. said in an e-mailed research note.

Hungary was the first European Union member to obtain an International Monetary Fund-led bailout to avert a default during the credit crisis. The central bank has cut the benchmark interest rate to 5.25 percent, the lowest since the fall of communism in 1990, from a record 11.5 percent in October 2008.

Orban, who hasn’t said who he would like to see succeed Simor, has criticized the central bank for being slow to reduce the benchmark rate. He also blamed policy makers for failing to stop the spread of foreign-currency-based loans, one of the reasons cited by investors when they sold Hungarian assets in 2008, pushing the country to the brink of default and forcing the government to take the emergency loan.

The central bank ended 10 months of rate cuts last month in part because of investor concern that Orban planned to loosen fiscal policy after gaining power following eight years in the opposition. Orban reversed course and announced a special tax on banks, a government spending freeze and cuts in aggregate state salaries to meet the budget target after investors sold local assets.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

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