Over the summer, things appeared to be improving there. Prime Minister Viktor Orban’s government had amended prior legislative changes that would have limited the central bank’s independence and eroded some personal freedom. The need to comply with EU treaties, it seemed, would trump Orban’s ultra-nationalist aims.
Now, however, it appears optimism was premature. Orban may have adjusted the central bank legislation to comply with the EU’s requirements, but in practice, he’s still managed to strip the bank’s independence. In 2011, Orban appointed four “non-executive members” to the bank’s board, and these individuals have steamrolled monetary policy in Orban’s preferred direction, overruling bank President Andras Simor and his deputies.
Orban has been dissatisfied with Simor’s monetary policy since he took office in 2010. Simor has focused on preventing runaway inflation—a real risk in Hungary, where the currency is near all-time lows. Orban, however, wants monetary policy to be much more accommodative in order to offset the contractionary effects of his economic policy. Because he’s slapped banks, telecom and energy firms with extraordinary taxes, banks aren’t lending, businesses aren’t investing, and Hungary’s economy continues stagnating. Hence, Orban wants to slash interest rates to get capital moving again so he can keep these harmful taxes in place.
Simor would rather not play along—he understands loosening monetary policy will increase the risk of inflation and won’t fix Hungary’s underlying economic and policy issues. But rather than listen to reason, Orban seems content to continue forcing his agenda. Simor’s term expires next March, and Orban’s deputies are already eyeing a “new strategic alliance” with a central bank chief much more aligned with their interests—interests that likely include doing whatever it takes to artificially boost growth before the 2014 general election. A policy turnaround—something Hungary needs desperately—appears sadly unlikely.