Hungary's Central Banker Clashes With Audit Office

Hungary’s central bank rejected policy suggestions by the State Audit Office, saying the findings of a report by the watchdog were flawed and interfered with the bank’s independence.

It’s “strange” for the audit office to be found advising the Magyar Nemzeti Bank in a report on the “budgetary risks” of monetary policy, Governor Andras Simor said in a letter published on the bank’s website yesterday.

The audit office “would transcend its mandate and run counter to European Union” regulations and Hungary’s central bank law by “evaluating the central bank’s basic operations, including monetary policy or the management of foreign reserves,” Simor wrote.

Prime Minister Viktor Orban is set to pick a new central bank chief as Simor’s six-year mandate expires next month. The central bank should pursue a “conservative” policy course and avoid “surprises,” Economy Minister Gyorgy Matolcsy said Jan. 30 after earlier calling for the “brave” use of “unorthodox” monetary-policy tools to boost the economy.

The management of foreign-currency reserves carries a “significantly large risk” of making the central bank unprofitable and forcing the government to plug the deficit, the audit office said in a report published on its website. The report also suggests limiting commercial lenders’ access to two-week central bank bonds to reduce interest payments.

The forint fell 0.2 percent to 291.39 per euro by 12:58 p.m. in Budapest, weakening for the first time in four days.

Bonds, Reserves

Limiting the amount of two-week bonds sold to commercial lenders would be tantamount to monetary easing that is currently “incompatible” with the central bank’s goals, while failing to boost financing for the economy, Simor said.

Cutting the level of foreign reserves hinges on a decline of the country’s foreign-debt level and vulnerability, according to the letter.

“Decreasing the risk premium paid by the Hungarian state is the most efficient tool to cut the cost of maintaining foreign-currency reserves,” it said.

Widening the central bank’s “unconventional” policy toolkit is only useful in the event of “acute financial-market turmoil,” the Monetary Council said in a statement after a Jan. 29 rate decision.

The government wants to stimulate an economy mired in recession with elections scheduled for next year. Orban said he would name his nominee to succeed Simor one day before his mandate expires on March 3.

The “worst-case scenario” under new leadership would be the “appropriation” of foreign-currency reserves to repay external debt, analysts at Morgan Stanley said in an e-mail on Jan. 31.

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