The European Central Bank has blasted the Magyar Nemzeti Bank (MNB) for a lack of independence from the state, in a report released on April 7.
Several programmes run by the MNB could be viewed as the Hungarian central bank taking over state tasks, potentially conflicting with monetary financing prohibition - a rule that central banks cannot finance the public sector - the Eurozone's central bank writes in its 2015 annual report.
Following concerns raised in the previous year's report, the ECB monitored several MNB programmes unrelated to monetary policy last year. The issues have not been dispelled, the European regulator says, and it pledged to continue to closely monitor the operations.
The majority of the criticised programmes were carried out by the MNB's six foundations, which have been at the centre of several controversies over the past couple of years. The Hungarian central bank recently sought to have the foundations' books closed to public scrutiny. but that was ruled unconstitutional in early April.
The ECB concludes that the MNB’s real estate investment projects, programmes to promote financial literacy, and the purchase of Hungarian artworks and cultural property “could be perceived as being potentially in conflict with the monetary financing prohibition, to the extent that they could be viewed as the MNB taking over state tasks or otherwise conferring financial benefits on the state”.
The ECB urges the MNB to ensure that resources conferred on its network of foundations are not used, directly or indirectly, for state financing purposes.
Concern is also expressed over the transfer of staff formerly employed by the Hungarian Financial Supervisory Authority to the central bank. The ECB initially welcomed the MNB's takeover of the watchdog in 2013.
The MNB’s purchase of control in the Budapest Stock Exchange (BSE) in November is another worry, the report says. The MNB bought a 75% stake in BSE for HUF13.2bn (€42.5mn). According to ECB, the purchase may be seen as having used central bank resources to support an economic policy goal that is typically seen as a government competence.
The ECB noted that MNB also decided on several changes to its monetary policy instruments to support the 'self-financing programme'. The scheme has been successful in reducing the volume of external debt in Hungary's state borrowing.
“Given the resulting incentives for banks to purchase forint-denominated government securities, some of the changes, taken together, could be seen as a means of circumventing the prohibition of privileged access,” the ECB wrote.
The MNB offered a half hearted response in a statement. The central bank insists that "it is closely co-operating with the ECB [and] conducting active dialogue on the related topics in order to clarify the ECB’s list of open points as soon as possible."
The independence of the MNB has been eyed warily since Gyorgy Matolcsy took over as governor. The original architect of the "unorthodox" economic polices of the Fidesz government, the former finance minister moved to head the central bank in 2012.
Under his regime, the MNB has offered little argument against claims that it has lost much of its independence. Vice Governor Marton Nagy summed up the approach to bne IntelliNews earlier this year.
"Independence of the central bank means inflation targeting and financial sector stability," he stated in an interview. "The rest of the time the MNB can support the government."