The Hungarian central bank has launched a robust defence of its independence, following last month’s attacks from the new government that interest rates had been kept too high in the crisis.
Prime Minister Viktor Orban, who was sworn into office on Friday, criticized the central bank during the national elections last month for keeping interest rates too high. And Zoltan Pokorni, deputy chairman of the incoming centre-right Fidesz – Hungarian Civic Union party, said last month that MNB President Andras Simor should resign over investments in Cyprus.
But Julia Kiraly, deputy governor of the Hungarian National Bank (MNB), said the politicization of the monetary policy debate would not affect the central bank.
“Out monetary policy works outside of the political campaign and we are members of the European Central Bank network of central banks, which helps to preserve our independence.” She said “our independence” helps to address “time-sensitivity” of economic programmes, triggered by changes in government.
“The dogs bark but the caravan moves on,” she said, citing a proverb meaning that a well-run project will not be derailed by noisy protests.
Kiraly said the MNB would continue its drive to cut interest rates to stimulate growth as low inflation and the Greek bailout package boosts monetary policy firepower. The MNB cut the two-week repo rate by 25 basis points (bps) to an record-low 5.25% last month. The central bank has lopped 4.5% off the benchmark rate since July 2009.
“Economic activity is much below potential, which means it has a downward pressure on inflation,” she said. Consumer prices fell to 5.7% in April from 5.9% in March. And Kiraly said that inflation is likely to meet the central bank’s 3% target later in the year.
“Core inflation is significantly declining,” she said, adding that stronger global risk appetite and strength of the currency also gave the central bank room to cut rates. But she said the MNB retained the right to intervene in foreign exchange markets to curb excessive strengthening of the currency if the exchange rate level was not in line with economic fundamentals.
Orban, who won a landslide victory, said last month that the deficit was set to overshoot this year’s target 3.8% of GDP set by the IMF as part of its bailout package. Kiraly said she was “optimistic” that fiscal consolidation would kick in “because the new government has an overwhelming majority”.
Hungary’s public debt to GDP ratio is 80% compared with 40% in central and eastern Europe. Kiraly said it would take between five to 10 years for the debt stock to fall to 60% – in line with the European Union’s Stability and Growth Pact.
She stepped up her calls to curb foreign currency loans in the country. “We have huge accumulated foreign currency debt and unhedged positions, which need to be phased out,” endorsing EBRD president Thomas Mirow’s call on Thursday for short-term unsecured consumer lending in foreign currency to be phased out across the region.