The 2006 Monetary Transparency Report by Oxford Analytica asserts that Hungary has achieved an overall rating of "compliance in progress," noting that, although considerable success has been realized, the country remains committed to further improvements. The International Monetary Fund (IMF) has been even more positive in its appraisal, asserting that Hungary has completely observed requirements regarding the clarity of roles, responsibilities, and objectives of monetary policy, as well as in the areas of policy formulation and reporting, accountability, and assurances of integrity. The Hungarian central bank, Magyar Nemzeti Bank, provides public access to a wide range of publications that provide monetary data and information on the methodologies and assumptions that underpin policy decision making. Hungary is a member of the IMF's Special Data Dissemination Standard and meets all requirements for timeliness, coverage, and periodicity, as well as for the issuance of advance release calendars. While Hungary remains committed to adopting the euro, its 2010 target date has been pushed back, and no new official date has yet been set.

General Overview

According to the 2006 "Monetary Transparency" report published by Oxford Analytica (OA), the Hungarian central bank, Magyar Nemzeti Bank (MNB) has continued its progress toward consistent and transparent communications policy, which has led to improved monetary policy transparency. The OA report rates Hungary's performance as "compliance in progress," noting that "a large range of high-quality publications is available on [the MNB] website, including Quarterly Reports on Inflation which provide a concise description of economic conditions and forecasts" (p. 127). The report adds that cooperative relations between the MNB and the Ministry of Finance (MoF) have improved. However, Hungary's progress toward euro adoption has met with delay due to recent fiscal difficulties, and the target date of 2010 has been pushed back. Nonetheless, the MNB continues to work toward achieving Maastricht criteria. Beginning in 2007, therefore, Hungary has adopted a 3% inflation target for the medium-term, demonstrating the government's ongoing commitment to financial discipline.

In general, OA finds Hungary's MNB to be "largely compliant with the highest standards of monetary transparency" (p. 127), but nonetheless continues to work toward improvement. The MNB has maintained its cooperative and independent stance even though amendments to its underlying legislation contained provisions that could compromise that independence (in 2004, the prime minister was given enhanced powers of appointment over four members of the Monetary Council). Consensus-based policy making has helped demonstrate that even the new appointees to the Council were open to compromise, and the publication of Monetary Council minutes and votes has helped to encourage cooperation and accountability among Council members. In 2006, the Prime Minister created a three-member Convergence Council to advise the MNB on Hungary's Convergence Program. The OA report notes that, together, they have achieved improved data compilation and forecasting on inflation, the public debt, and the government deficit. However, OA adds that the MNB finds fault with the European Central Bank's (ECB) Convergence Program policy content, at least for the Hungarian context, arguing that "the proposed methods to reduce the public deficit could be harmful to potential growth and price stability" (p. 127).

In a 2002 Financial System Stability Assessment by the International Monetary Fund (IMF), Hungary's monetary policy transparency was discussed in even more positive terms than those of OA. According to the IMF, "the high degree of observance of the Code on Transparency in Monetary and Financial Policies by the MNB and other agencies in charge of financial sector regulation and supervision underlines Hungary's continuous efforts to be in the forefront on issues of transparency and standards" (p. 61). The IMF went on to state that "Hungary's observance of requirements on clarity of roles, responsibilities and objectives of monetary policy was complete" (p. 61) and added that compliance was complete in the areas of policy formulation and reporting, accountability, and assurances of integrity. Hungary is a member of the IMF's Special Data Dissemination Standard (SDDS), according to the IMF SDDS website. Hungary meets all requirements for timeliness, coverage, and periodicity, and for the issuance of advance release calendars.

In the 2007 IMF Article IV Consultation report, it was noted that recent inflationary pressures are expected to ease, with the result that monetary policy could contemplate rate reductions. However, the IMF recognized that the MNB was not yet prepared to rule out inflationary pressures going forward, citing ambiguity in the signals coming from current wage data. According to the IMF report, an expected decline in Hungary's policy rates might render monetary policy more relevant and effective. Earlier IMF reports had suggested that Hungary switch to a floating exchange rate, and the 2007 report reiterated that opinion, arguing that this would reduce constraints on policy making and improve risk management. Here, too, however, the IMF has encountered resistance from Hungarian authorities, who fear that there might be a short-term appreciation in the currency.

The Principles

Clarity of roles, responsibilities and objectives of central banks.

CP

The 2006 OA report accords Hungary a rating of "compliance in progress" for this principle, unchanged from the previous year. Hungary's monetary policy is governed by the 2001 Act on the Magyar Nemzeti Bank (MNB Act), which was intended to comply with EU standards existing at the time. OA noted, however, that the ECB has indicated the need for future amendments in order to more appropriately define the MNB-ECB relationship. The MNB Act places responsibility for monetary policy with the MNB and establishes price stability as the primary policy goal. To this end, the MNB is also required to help the State Financial Institutions Commission in formulating policy for the financial system. The Act creates exclusive authority for the MNB in the issuance of currency and the management of foreign exchange and gold reserves. While the government works alongside the MNB in setting the exchange rate, the MNB's price-stability mandate is required by law to take priority, and only the MNB is empowered to implement exchange rate policy. The Act also makes the MNB the government's banker and fiscal agent, and confers upon the bank an advisory role in the areas of economic policy and international cooperation. However, the MNB Act explicitly prohibits the central bank from purchasing state securities in the primary market and from issuing credit to the government or any of its agencies in the public sector.

In carrying out its mandate, the MNB is explicitly granted full operational autonomy. The OA report notes that the MNB's autonomy has, at times, met with certain challenges by the executive, which has engaged in open confrontation in the past. This situation was exacerbated with the 2001 appointment of Zsigmond Jarai as MNB's Governor, an individual who has openly expressed his political loyalties and "favored people of a similar persuasion in his appointment policy" (p. 128). Adding to the potential for reduced autonomy was the 2004 passage of an amendment to the MNB Act, according to which the selection process for Monetary Council members was changed. According to OA, the Prime Minister's role in the process was enhanced, and he was given the authority "to directly nominate four of the members with the president of the Republic responsible for the formal appointment" (p. 129). Both the MNB and ECB found this change to be unnecessary. Despite fears of potential politicization of monetary policy, OA reports that there has been no confrontation between the four new appointees under the amendment. The newly appointed Council members are appropriately credentialed and experienced, and OA finds that "collaboration at the expert level has improved" (p. 129). OA notes that the ECB's 2004 Convergence Report called into question the role played by the Ministry of Justice in drafting NMB-related legislation. Ostensibly, the MoJ is restricted to verifying the constitutionality of any such draft laws, and the ECB expressed the concern that the arrangement could have negative implications for MNB independence. This issue is currently under consideration by the government. The ECB also raised concerns about the enforcement of certain ethical standards, specifically "the legal requirement that the NBH governor and the Monetary Council members declare their wealth upon appointment and every two years thereafter" (p. 129). Although the law provides for sanctions against such misconduct, its enforcement is uncertain.

While the MNB may comment on the annual budget proposal, it is neither required to do so nor is its opinion published as a part of the budget, according to the OA report. On the other hand, the central bank does carry out quarterly budget reviews, and does publish its opinions in the Quarterly Inflation Report. By law, the government must include the head of the MNB in cabinet meetings that touch upon areas within the MNB's responsibilities. OA adds that the MNB's Report on Financial Stability includes an evaluation of financial sector performance, and the MNB consults with the Financial Supervisory Authority (FSA) on banking supervision issues. The MNB also contributes representatives to serve on the Financial Stability Committee (along with representatives from the MoF and the FSA). It also participated in EU committees relating to its policy, supervisory, and regulatory functions in the international context.

As the government's banker, the MNB is required by law to manage the State Treasury accounts and "other government accounts specified by the minister of finance, as well as the accounts of the Hungarian Privatization and State Holding Company... and of the Government Debt Management Agency [AKK]" (p. 130). The bank's relationship with the MoF and the AKK is covered by a memorandum of understanding. Beginning in 1995, the AKK has taken an increasingly dominant role in managing foreign debt, once the exclusive province of the MNB. The AKK was originally a part of the Treasury Department, but has been separated since 2001. The MNB and AKK enjoy a good, cooperative relationship, according to the OA report, and the MNB expresses its opinion on AKK government debt management. However, the two agencies do no collaborate on analytical research.

According to a 2002 report by the IMF, "the high degree of observance of the Code on Transparency in Monetary and Financial Policies by the MNB and other agencies in charge of financial sector regulation and supervision underlines Hungary's continuous efforts to be in the forefront on issues of transparency and standards" (p. 61). The IMF went on to state that "Hungary's observance of requirements on clarity of roles, responsibilities, and objectives of monetary policy was complete" and added that compliance was complete in the areas of policy formulation and reporting, accountability, and assurances of integrity.

Open process for formulating and reporting monetary policy decisions.

CP

According to the 2006 OA report, Hungary has earned a rating of "compliance in progress" (p. 132) for this principle, unchanged from the previous year. The legislative framework underlying the MNB's monetary policy role is contained within the MNB Act of 2001, which stipulates a primary goal of price stability and formally mandates the implementation of an inflation targeting mechanism to achieve policy goals. Transparency in policy making is enhanced by the MNB's Quarterly Report on Inflation, in which it presents a clear statement of policy issues and prospective policy responses in the event of deviations from targeted goals. To maintain monetary discipline, a medium-term inflation target of a 3% increase in the consumer price index was adopted, to begin in 2007. The target is set for review in three years, but the OA report notes that "no formal provisions exist for accountability and remedial action" (p. 132) should the MNB fail to meet its target. The OA report notes that Hungary has historically enjoyed success in meeting its targets, with 2003 being the only year in which the target was missed. However, the report did suggest the likelihood that the target would be missed again for 2006, because of increased inflationary pressures. The MNB also focuses on exchange rate targets, according to OA, which notes that the exchange rate policy follows the regime established by the EU's Exchange Rate Mechanism-2 (ERM2). OA comments that Hungary has had mixed success in its attempts to target both inflation and the exchange rate, particularly since there has been a confrontational relationship between the central bank and the government, and fiscal policy has been relatively lax. These difficulties have led many in Hungary to the conclusion that the exchange-rate targeting framework should be abandoned in favor of a flexible exchange rate. OA finds it unlikely that this course would be adopted, citing as a primary inhibitor the fact of "widespread reliance of Hungarian consumers on foreign currency-denominated borrowing" (p. 133).

Policy-making is the exclusive responsibility of the MNB's Monetary Council, per provisions of the MNB Act of 2001. Because of this, the 2004 MNB Act amendment that granted exclusive nominating rights for four new council members to the Prime Minister gave rise to concerns that the MNB's autonomy might be compromised. (The previous arrangement allowed the MNB governor to take the initiative in adding new members and the parliament had to conduct investigations, although the Prime Minister needed to agree to the final appointee). By the terms of the MNB law, nominees must be selected for their expertise in the monetary, financial, and banking sectors and are MNB employees for the duration of their six-year terms. Under present law, after the expiration of a term, the individual cannot be reappointed for the following three years. The OA report noted that the Prime Minister's appointees have thus far not had an adverse or politicizing effect on Council policy.

The Council's internal policy committee meets weekly to develop the Council's agenda, based on its regular assessment of the current monetary environment and prospects for the future. At the regularly scheduled, fortnightly Council meetings, the minister of finance or other ministerial level officials may attend but may not cast votes. Majority voting is the rule within the Council. Beginning in December 2004, the MNB has been publishing the minutes of Council meetings (without attribution) along with a report on the Council's votes and a discussion of the macroeconomic and financial environment. The Council voting record was made publicly available beginning in October 2004, with the aim of improving accountability on the part of council members. On the other hand, OA reported that the Monetary Council still rarely releases official statements to the media.

The schedule of regular Council meetings is published a year ahead on the MNB website. Also available on the website are what OA has termed "a wide-ranging series of periodic publications" (p. 134). According to both OA and the MNB website, the central bank is committed to the idea that transparency depends upon regular communication with the markets. The MNB issues a Guide to Monetary Policy in Hungary that the OA report terms "comprehensive" (p. 135). The macroeconomic environment and prospects for the future, as well is their policy implications, are covered in the MNB's Annual Report, which also offers information on the bank's achievements to date, the current policy agenda, changes in policy instruments, and related issues. The website also offers access to the MNB's annual Report on Financial Stability and its annual Report on Convergence, along with a Quarterly Report on Inflation. Twice a year, in May and November, the Quarterly Report on Inflation is expanded to include a detailed analysis of fiscal issues as well. Another MNB publication is the monthly Chart Pack of Recent Economic and Financial Market Developments. Other occasional publications are aimed directly at the public and provide monetary policy explanations couched in non-technical terms.

The MNB invites the participation of market actors and other experts by sponsoring meetings, and it consults with ECB experts on the appropriateness of its forecasting models, according to OA. These procedures are not formalized as public hearings, however, nor is there any formal effort to systematically collect expert opinion in advance of policy making. The OA report notes that, in the past, the MNB's communications fell short at times, leading to erosion in the central bank's credibility, but improvements have been made in recent years. The governor of the MNB is required to deliver the Annual Report to parliament, and may appear before parliamentary committees in response to requests for additional information. While in theory this would constitute "adequate oversight" according to the OA report, its effectiveness is undermined by what has appeared to be "weak parliamentary interest." (p. 135). Data reporting to the MNB by Hungarian financial institutions is also covered by provisions of the MNB Act of 2001. According to the Act, the MNB can require the information it needs from banks and other financial institutions and can carry out on-site inspections of reporting institutions. It also has the authority to levy sanctions in the event of noncompliance. According to the OA report, although actual supervisory authority falls to the FSA, the MNB and FSA are legally required to work cooperatively, and each agency shares information and garnered through their individual investigations.

According to a 2002 report by the IMF, the MNB has an open process for formulating and reporting policies. The IMF observes that "the high degree of observance of the Code on Transparency in Monetary and Financial Policies by the MNB and other agencies in charge of financial sector regulation and supervision underlines Hungary's continuous efforts to be in the forefront on issues of transparency and standards" (p. 61). The IMF goes on to state that "Hungary's observance of requirements on clarity of roles, responsibilities, and objectives of monetary policy was complete" and added that compliance was complete in the areas of policy formulation and reporting, accountability, and assurances of integrity.

Public availability of information on monetary policy.

CP

The 2006 OA report accords Hungary a rating of "compliance in progress" (p. 137) with regard to this principle. According to the IMF's SDDS website, Hungary is an SDDS subscriber and meets or exceeds all requirements for coverage, periodicity, and timeliness. It makes advance release calendars for the release of monetary data available on the SDDS and MNB websites. The SDDS website also discloses that Hungary takes advantage of no flexibility options in its reporting of macroeconomic data.

The public has access to the MNB's statistical balance sheet on the central bank's website, where it is posted monthly. The final, consolidated balance sheet, plus an independent auditor's statement, is published in the Annual Report that is also available on the MNB website. The 2006 OA report notes that the MNB's activities as the government's banker are less thoroughly reported to the public. There is no public dissemination of the rules governing the extension of extraordinary credit. This is justified as an attempt to avoid the problem of moral hazard, and OA noted that the MNB "has typically announced the details of such support shortly after the event" (p. 137), even though it has no legal obligation to do so. For the most part, OA has found the MNB's public information efforts to be of high quality. Public outreach is achieved primarily through the MNB website, where individuals can access a wide range of publications in English and Hungarian. The website also offers access to press releases and public statements issued by the bank or its representatives, and the text of legislation relating to the MNB's activities. The OA report adds that the MNB announces all its decisions at press conferences and maintains an interactive internet forum, accessible to registered participants, after the release of its Quarterly Inflation Report. In addition, the MNB maintains a publicly accessible library of specialized publications.

The IMF observed in 2002 that "the high degree of observance of the Code on Transparency in Monetary and Financial Policies by the MNB and other agencies in charge of financial sector regulation and supervision underlines Hungary's continuous efforts to be in the forefront on issues of transparency and standards" (p. 61). The IMF went on to state that "Hungary's observance of requirements on clarity of roles, responsibilities, and objectives of monetary policy was complete" and added that compliance was complete in the areas of policy formulation and reporting, accountability, and assurances of integrity.

Accountability and assurances of integrity by the central bank.

FC

According to the 2006 OA report, Hungary has achieved "full compliance" (p. 138) with this principle. Accountability of the MNB governor is established by the MNB Act's requirement that he present himself before the parliament to deliver the central bank's Annual Report. He may also be ordered to appear before parliament or any of its committees to be questioned on policy concerns, and he may be called upon by the government to make monetary policy presentations as well. Before submission to parliament, the MNB's Annual Report must be approved by the State Audit Office, the supervisory board of the MNB, the MoF, and an external auditing firm. In parliament, approval must be gained from the economic, finance, and budget committees. The OA report noted that a politicized parliament failed to approve the Annual Reports for 2002 and 2003, and attributed this to "a protest against the high interest rates in the country" (p. 138).

The MNB's financial statements are subject to audit. Provisions of the MNB Act require that an external auditing firm be contracted to review the Annual Report as a whole (OA noted that the current contract is held by Ernst & Young). In addition, however, there is an internal audit department, overseen by the Supervisory Board, which reports its findings to the MNB's Audit Committee and Board of Directors. On the strength of these audit results, the Audit Committee issues recommendations. Compliance within a year is expected. The MNB is also subject to inspection by the State Audit Office, which investigates legal and regulatory compliance, not financial or monetary issues. The OA report stated that "there is no formal mechanism for follow-up" (p. 138). Finally, the MNB's code of conduct for officials and staff are set forth in the MNB Act of 2001 and include coverage of conflicts of interest as well as setting forth the terms by which the governor and vice-governors of the MNB may be appointed or discharged. The OA report adds that the MNB requires its employees to sign confidentiality agreements, but that there is no provision of protection from personal liability in the conduct of official duties since, "under Hungarian law, liability does not extend to employees of public institutions" (p. 139).

The IMF observed in 2002 that "the high degree of observance of the Code on Transparency in Monetary and Financial Policies by the MNB and other agencies in charge of financial sector regulation and supervision underlines Hungary's continuous efforts to be in the forefront on issues of transparency and standards" (p. 61). The IMF went on to state that "Hungary's observance of requirements on clarity of roles, responsibilities and objectives of monetary policy was complete" and added that compliance was complete in the areas of policy formulation and reporting, accountability, and assurances of integrity.