UPDATE 2-ECB warns Hungary govt on cbank as bank sees hikes

* ECB warns govt influence on cbank contrary to EU Treaty

* “Modest” tightening, not necessarily many steps-Gov Simor

* Law changes undermine monetary policy credibility – Simor

(Adds ECB, background, analyst)

By Marton Dunai and Krisztina Than

BUDAPEST, Dec 14 (BestGrowthStock) – The European Central Bank (ECB)
warned Hungary’s centre-right government on Tuesday to respect
the independence of the country’s central bank while the bank’s
governor said more rate hikes could be needed to tame inflation.

Hungary’s Fidesz government, which took office in May, has
called for lower interest rates and plans to change the central
bank law to effectively allow the government control over the
appointment of a majority of rate setters next year.

The ECB said in a statement on Tuesday that planned changes
to the central bank law coupled with government criticism of the
bank could be seen as an attempt to influence its policymaking.

“As the ECB has consistently noted in its Convergence
Reports, any such influence would be contrary to Article 130 of
the Treaty which requires governments of the Member States to
respect the principle of central bank independence,” it said in
its opinion on Hungary’s latest law amendment plans.

The ECB warning is the latest episode in the battle between
the central bank and Prime Minister Viktor Orban’s government,
which had earlier called on Governor Andras Simor to resign and
also slashed central bankers’ salaries.

The government, which has stunned markets by using
unconventional fiscal methods to boost growth such as special
taxes and winding up the private pension pillar, has most
recently said the bank’s rate hike last month was unjustified.

The central bank delivered a surprise rate hike on Nov. 29,
its first move after a six-month pause, raising rates to 5.5
percent from an all-time low of 5.25 percent (NBHI: ).

It flagged a persistently high medium-term inflation path
and the country’s external vulnerabilities.

Simor said in an interview published in the Wall Street
Journal on Tuesday that the tightening cycle would be “modest”
and said:

“One should not believe that a 25-basis-point increase will
get inflation back to target… That doesn’t necessarily mean
that we need many steps.”

“The Hungarian economy is still vulnerable to shifts in
investor sentiment,” Simor said. “(The) risk assessment of
Hungary if anything has deteriorated during the recent months.”

Simor criticised the government’s plan to let itself control
the appointment of four new members for the rate-setting
Monetary Council due next March, giving it a majority.

The Council has seven members, and the mandates of four
expire next year. Under the existing system, two of the new
appointees would be named by the central bank governor and two
by the prime minister.

Analysts say that the new members will now likely reflect
the government’s dovish bent on monetary policy and there has
been speculation the bank’s inflation target could be raised to
3.5 percent from the current 3 percent, allowing looser monetary
policy. ((For an analysis on this click on [ID:nLDE6B40E9]))

Simor said the government bill giving parliament the power
to appoint the four council members was “an unnecessary
development that raises questions about the central bank’s
commitment to price stability, and this undermines the
credibility of monetary policy”.

Analysts said the ECB’s warning was unlikely to deter the
government from submitting the planned central bank law
amendment to parliament where it has a two-thirds majority.

“There has been a precedent: EU bodies were unable to stop
the (previous Socialist) government when it enlarged the
Monetary Council (in 2005), and the same is likely now,” said
Matyas Kovacs, analyst at Raffeisen Bank.
(Additional reporting by Sandor Peto; editing by Stephen
Nisbet)

UPDATE 2-ECB warns Hungary govt on cbank as bank sees hikes