Draghi supports Hungary's embattled central bank

Friday - 12/7/2012, 12:42pm EST

By PABLO GORONDI
Associated Press

BUDAPEST, Hungary (AP) - European Central Bank President Mario Draghi on Friday defended his Hungarian counterpart against the government's efforts to limit his independence and authority over monetary policy.

Draghi emphasized the importance that central banks remain independent of government influence.

Prime Minister Viktor Orban and his government have over the past two years frequently been critical of National Bank of Hungary President Andras Simor's policy decisions. Orban's government also has tried to diminish Simor's influence over monetary policy, but under international pressure - including from the ECB - has relented.

"It's an opportunity to pay (Simor) a tribute of gratitude for his work," Draghi said while speaking at a conference hosted by the NBH. "I want to acknowledge his commitment ... to Europe and to his country."

Simor and his two deputies have in recent months consistently been outvoted by the four, government-backed members of the rate-setting Monetary Council. That resulted in the NBH lowering its key interest rate during each of the last four months - from 7 percent in August to 6 percent now - to align itself with government efforts to boost economic growth.

In his speech, Draghi appeared to support Simor in his votes against the rate cuts, noting that such aggressive interest rates reductions could fuel inflation.

Hungary is struggling to fuel economic growth - gross domestic product contracted an annual 1.5 percent in the third quarter of 2012 - while also coping with the highest inflation rate in the European Union, an annual 6 percent in October.

While stressing that Hungary had made "considerable achievements" in improving the economy, Simor also criticized some of the government's measures, including exceptionally high taxes on banks and other sectors as well as the nationalization of private pension funds.

"The frequent changes in the regulatory environment and the windfall taxes have rendered all commercial calculations concerning the future uncertain, leading to a predictability chaos," said Simor, whose six-year term ends in March. "The primary problem is not the fiscal deficit by rather a lack of confidence."

The ECB has expressed repeated concerns about Hungary's changes to its central banking law. The International Monetary Fund and the European Union threatened to withhold financial rescue funds if it did not back off, leading Hungary to comply.

In its last legal opinion from June 28, the ECB said the Hungarian government's response "addresses the most important remaining concerns" about central bank independence. But the bank added that it "will monitor closely the observance in practice of central bank independence" in Hungary.

As an EU member, Hungary is on paper committed to adopt the euro, the currency zone for which the ECB sets monetary policy. There is no fixed timetable, however, for the country to meet the tough requirements for limiting debt, deficits and inflation needed to join the euro bloc.

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David McHugh in Frankfurt contributed to this report.


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