New central bank law comes into effect

The Hungarian Constitution of 1949, which was substantially redrafted in 1989 and 1990, was replaced by the Fundamental Law on January 1 2012. Among its provisions relating to public finance matters, the Fundamental Law maintains that the central bank of Hungary – responsible for monetary policy – will be the Magyar Nemzeti Bank (MNB), and provides that detailed rules on monetary policy and on the governance, organisation and operation of the MNB will be adopted by a special constitutional law (referred to as a cardinal act) which must be adopted by Parliament with a qualified majority.

On the basis of the Fundamental Law, the Magyar Nemzeti Bank Act 2011 (Act 208/2011) has replaced the Magyar Nemzeti Bank Act 2001 (Act 58/2001). The MNB is obliged to adapt its governance and operation to accord with the new law by the end of March 2012. In the past two years the MNB Act 2001 was amended no less than 10 times; most of the changes affected the MNB's governance, appointment of members of its decision-making bodies and remuneration of these persons. It has also been a regular practice of the government to criticise the MNB's monetary policy; over the past 18 months the prime minister has even made personal attacks on the governor of the MNB. Another insult was a cap introduced a year ago – applicable to the incumbent – which set the governor's maximum remuneration at 10 times the average monthly gross income (approximately €40,000 per year – far below the usual managerial income in the financial sector). These legislative changes and political practices show the lack of a stable legislative framework for the MNB, and reflect the Hungarian government's lack of respect for the central bank's independence through its attempts to exercise influence over the bank.

Against this backdrop, the European Central Bank (ECB) stated that it "would welcome a recast [of the MNB Act] that results in a long-term stable basis for central banking in Hungary".(1) However, on the basis of the MNB Act 2011, the possibility that the government may still try to exercise political influence over the MNB cannot be excluded. This update briefly describes the changes which give rise to such concerns.

Under the MNB Act 2001, the incumbent governor was responsible for both the implementation of the Monetary Council's decisions and the operational management of the MNB. Under the new law, however, the governor's only responsibility is as head of the Monetary Council and the board of directors. The Monetary Council – the supreme decision-making body of the MNB – may now decide almost any issue which falls within the MNB's scope of activity, and may retain every power in connection with the execution of its decisions. At the same time, the law reinstates the executive board, which was eliminated from among the governing bodies of the MNB less than five years ago. The executive board is responsible for the implementation of the Monetary Council's decisions which have not been retained by the council and for directing the operations of the MNB.

The Monetary Council has seven members under the MNB Act 2001, but under the new law it is possible to add two new members. The members of the executive board are the governor and the deputy governors. The MNB Act 2011 provides that the number of deputy governors may be increased from two to three. This increase in the number of Monetary Council members and deputy governors does not seem to be justified by any real need of the MNB to fulfil its tasks. Both the governor and the deputy governors will be appointed by the president of Hungary on the recommendation of the prime minister, and even the countersignature of the prime minister is necessary for their appointment and dismissal. The external members of the Monetary Council will be appointed by Parliament.

The previous powers of the governor have thus been transferred to the Monetary Council and the executive board, where the number of newly appointed or external members will increase. It remains to be seen whether these new members will act with the independence as required of their status, and with a view of the primary task and mission of the MNB.(2)

In addition, the governor's reporting obligations to Parliament and to Parliament's Economic Committee have been increased.

But perhaps the greatest concern comes from another initiative. The Fundamental Law provides that Parliament will adopt certain transitional provisions which are necessary for the Fundamental Law to take effect by a cardinal act. Thus, on December 30 2011 Parliament adopted a transitional act; however, it includes provisions that are not temporary, but are in effect the first amendments to the Fundamental Law. One of these amendments provides for the merger of the MNB and the Financial Supervisory Authority into a newly created legal successor, in which the governor of the MNB and the president of the authority would become vice presidents under a newly appointed president. This merger, if implemented, would certainly be a breach of the incumbent governor's personal independence. The ECB noted, in an 'own-initiative' opinion, that the manner in which this merger would be implemented is unclear, and that:

"the new institution should be fully independent with a precise definition of its mandate in compliance with the central bank independence principle, including functional, institutional, financial and personal independence, and with the role of the central bank as part of the ESCB."(3)

On January 17 2012 the European Commission commenced infringement proceedings against Hungary on three different grounds, one of which is the proposed violation of the MNB's independence. Hungary has also applied for a joint EU-International Monetary Fund (IMF) facility to strengthen its financial position. Both the European Union and the IMF have stated that, as a precondition to launching the negotiations, Hungary must make decisive steps towards compliance with EU laws.

For further information on this topic please contact István Gárdos at Gárdos, Füredi, Mosonyi, Tomori by telephone (+36 1 327 7560), fax (+36 1 327 7561) or email (gardos.istvan@gfmt.hu).

Endnotes

(1) Opinion of the European Central Bank of December 14 2011 on the Magyar Nemzeti Bank (CON/2011/104).

(2) At its latest meeting on January 24 2012, the Monetary Council voted to leave the central bank base rate unchanged at 7%. This decision was made against market expectations that the base rate would be raised. It is widely assumed that the decision was the result of the external members' resistance.

(3) Opinion of the European Central Bank of December 22 2011 on the Magyar Nemzeti Bank's independence (CON/2011/106).