Hungary Fails to Ensure Central Bank Independence, ECB Says

Hungary’s disputed central bank law, which stalled bailout talks last year, fails to meet “all the requirements for central bank independence” and threatens investor confidence, the European Central Bank said.

Hungary needs “stability-oriented” monetary policy as well as “market confidence in the full independence of the central bank,” the Frankfurt-based ECB said in a report published on its website today.

“The government should actively seek to improve foreign investor sentiment by adopting international best practices on central bank independence and respecting the existing contracts between private parties in the implementation of government policies,” the ECB said.

Prime Minister Viktor Orban is seeking to revive aid negotiations with the International Monetary Fund and the European Union, which broke down last year after the institutions said new regulations didn’t guarantee monetary-policy independence. Amendments to the central bank law, which lawmakers are scheduled to vote on June 4, partially disregard ECB concerns, Magyar Nemzeti Bank President Andras Simor said yesterday.

‘Address Concern’

“The government will have to address concern over executive control at the central bank moving to the MPC, which seems to have caused consternation at the IMF, EC and indeed ECB,” Tim Ash, a London-based economist at the Royal Bank of Scotland Plc, said in an e-mail today.

The forint weakened 0.5 percent to 299.31 per euro by 3:16 p.m. in Budapest, extending this month’s decline to 4.2 percent. The yield on the three-year government bond rose 8 basis points to 8.425 percent, the highest in five weeks.

The government’s “strong commitment to engage in all policy issues relevant to macroeconomic stability” is a prerequisite for EU-IMF financial assistance, the ECB said. “Fiscal governance remains problematic in Hungary and is weakening investor confidence in the transparency, predictability and sustainability of Hungarian fiscal policies.”

The European Commission, the EU’s executive arm, recommended today the lifting of cohesion fund sanctions against Hungary citing government measures to consolidate public finances. A meeting of EU finance ministers on June 22 will take the final decision on the recommendation.

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