Room for Hungary rate policy moves is narrowing, central bank warns

By Gergely Szakacs

BUDAPEST (Reuters) - Hungary's central bank on Wednesday repeated a warning that government moves to curb its independence could limit the room for monetary policy manoeuvring as Prime Minister Viktor Orban moved to tighten oversight of the bank's operations.

The Hungarian forint rebounded from one-year-lows near the key 400 mark hit on Tuesday, pressured by moves by European lawmakers to overturn a decision to release 10 billion euros of EU funding to Hungary and a deepening standoff between the bank and Orban's government.

The bank has slashed its base rate by 900 basis points since last May. But with global central banks likely to keep interest rates higher for longer, the scope for further aggressive cuts to Hungary's 9% benchmark rate, the EU's highest, is narrowing.

"A monetary policy strategy aimed at reaching and preserving price stability can only be credible and therefore effective if the central bank is independent from political pressure focused on short-term benefits," Bianka Horvath, a former rate-setter now working as an aide to Governor Gyorgy Matolcsy said.

Orban and his former ally Matolcsy have been embroiled in an increasingly bitter policy spat since the 2022 election, trading blame over the worst inflationary surge in the European Union.

"Outside intervention affecting the outcomes of central bank measures ... infringes the independence of central banks, limits the effectiveness of monetary policy decisions and narrows the room for monetary policy manoeuvre," Horvath said in a piece published on the bank's website.

The government has said its proposed changes to the central bank law would not affect the bank's core tasks such as setting monetary policy and its independence was not under any threat.

Horvath said government caps on prices and interest rates and other measures affecting monetary transmission, a practice also criticised by some credit rating agencies, could force the bank into maintaining tight monetary conditions for longer.

The bank's next policy meeting is due on March 26.

Declines in the forint, central Europe's worst-performing currency this year, already derailed the bank's plan in January to temporarily ramp up the pace of rate cuts, though last month it delivered a larger, 100-basis-point cut, as expected.

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The government has repeatedly piled pressure on Matolcsy, whose second six-year term expires next March, to cut rates more aggressively to help the economy rebound as the veteran Orban, in power since 2010, faces a heavy 2024 election calendar.