Hungary's National Bank (MNB) said the government’s draft amendment of the Central Bank Act would restrict its independence, which could undermine financial stability.

The fighting between Hungary's monetary and fiscal authorities has helped weaken the forint. Hungary’s currency shed more than 1% on March 12, trading a tad below the psychological 400 level.

The MNB has compiled its list of reservations in a statement issued on its website on March 12.

The finance ministry’s proposals, which have been sent to the European Central Bank (ECB) for consultation, would extend the scope of power of the supervisory board, in which government-appointed members make up the majority.

The supervisory board’s approval would be required for decisions involving expenditures exceeding the amount defined in the founding charter of bank, furthermore, it could be authorised to audit economic entities majority-owned by the MNB, including its controversial foundations.

The MNB recalled the ECB’s position on the issue, which said that the supervisory board cannot audit activities related to the fundamental tasks of the central bank. MNB subsidiaries are already audited by the state audit office, it added.

The MNB predicts that the government’s proposal would essentially give management rights to the supervisory board that could affect the bank’s core activities.

The central bank fears that the draft legislation, if adopted, could be used to “build narratives against the Hungarian economy and undermine financial stability". It rejects any attempt that may be used to limit its independence, the bank stressed.

MNB Governor Gyorgy Matolcsy called out his former deputy Marton Nagy for orchestrating attempts to undermine the bank’s independence. Nagy became the economic advisor of Prime Minister Viktor Orban soon after being sacked by Matolcsy in May 2020. Two years later he was appointed economy minister in the fifth Orban cabinet.

The debate on the central bank’s independence comes at a time when Hungary is grappling  with a collapsed budget. The government has just abandoned its GDP targets.

Economists say the infighting within the Orban regime is unnerving investors and hurting the currency, given the ongoing freezing of EU funds because of its violations of the rule of law. 

Hungary is reliant on portfolio investment inflows to support its capital account, but these flows are likely to be susceptible to worries about policy direction. "Attacking the central bank, this is not the best combination," Gunter Deuber, chief economist of RBI, told bne IntelliNews.

The forint on Tuesday fell to a one-year low of 399 against the euro. The sell-off in the currency was initially triggered by news that the European Parliament's legal affairs committee backed legal action for suing the European Commission over a decision to unfreeze €10bn for Hungary in late 2023.

The parliament believes that Hungary has not met the rule-of-law thresholds set by the Commission to warrant releasing the frozen funds. There is also another €21bn of EU funds earmarked for Hungary frozen on other issues.