By Boldizsar Gyori and Gergely Szakacs
BUDAPEST (Reuters) - Hungary's central bank on Tuesday doubled down on its criticism of a proposed law change it says could erode its independence, deepening a standoff with the government that has unnerved investors and helped send the forint to one-year lows.
Prime Minister Viktor Orban and his former ally, central bank Governor Gyorgy 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.
Inflation pushed Hungary's economy into a recession last year. Recovery has faced headwinds from prolonged weakness in Germany and a slow rebound in consumer spending, even as price growth fell below expectations at the start of the year.
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.
On Wednesday Orban's nationalist government could discuss legislation that would widen the central bank supervisory board's controls over activities outside its basic tasks, such as setting monetary policy.
The National Bank of Hungary (NBH) says the proposed changes would affect its independence by curbing the purview of management and could impede management decisions when disagreements arise over various tasks.
"If passed, the new law could be used to build narratives against the Hungarian economy and hurt our financial stability," it said in a statement on Tuesday.
"While on the surface the current central bank bill is about other tasks, it serves the sole purpose of influencing NBH management's decisions related to basic tasks and other decisions within the scope of NBH independence."
Members of the NBH's supervisory board include elected lawmakers and a representative and an expert of the finance ministry.
In a Feb. 26 opinion, the European Central Bank found no major problems with the legal amendment but stressed that broadening the supervisory board's purview should not undermine the NBH's "ability to carry out independently a task falling within the scope of the European System of Central Banks".
Orban's government, which EU critics have accused of creeping authoritarianism, something it denies, has said the changes would not apply to monetary policy.
The latest turn in the standoff, which coincided with European lawmakers seeking to overturn a decision to release 10 billion euros of EU funding to Hungary, has depressed the forint to new one-year-lows near the key 400 mark versus the euro.
"Today we have seen yet another perfect storm in the forint market," ING economist Peter Virovacz said. The currency is down nearly 4% for the year, underperforming central European peers.
Virovacz said the falls in the forint, which sank to record lows against the euro in October 2022, could also limit the scope of further rate cuts at the NBH's next policy meeting on March 26, a scenario the NBH itself had warned about.
The bank has slashed its base rate by 900 basis points since last May. But with global central banks likely keeping interest rates higher for longer, the scope for further aggressive cuts from the EU's highest 9% benchmark rate is narrowing.