Dec 8 (Reuters) - Hungary's government plans to change the central bank law to let a parliamentary committee fill all vacant posts on the central bank's Monetary Council next year when the mandates of four rate setters expire.
The move would leave central bank (NBH) Governor Andras Simor and his two deputies in a minority on the seven-member panel and could pave the way for monetary policy changes favoured by the government.
The changes in the bank will come in a crucial period when markets will be nervous anyway as the government must detail a savings plan of up to 800 billion forints ($3.78 billion) to persuade investors that its economic policy is sustainable.
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Q: How does the government plan to change the law?
A: According to a planned amendment, parliament's economic committee -- where government lawmakers have a majority -- would be allowed to appoint new Monetary Council members.
That would strip Simor -- often criticised by the government -- of his right to nominate two members. The six-year mandates of Tamas Banfi, Peter Bihari, Csaba Csaki and Judit Nemenyi expire on March 1 next year. The terms of Simor and his deputies, Julia Kiraly and Ferenc Karvalits, end in 2013.
The European Central Bank (ECB) is expected to publish its view on the planned changes in the next two weeks. Analysts said the change could hurt the NBH's independence, and the ECB and the European Union could criticise the government. Sanctions are unlikely as the move does not affect existing mandates.
Earlier the EU called on Hungary to change a law which cut public sector pay -- including at the central bank -- which it said infringed the bank's independence. The government has kept the measures in place.
Q: Will the central bank lift its inflation target?
A: According to a report by news portal index.hu, the government wants to have the central bank raise its inflation target to 3.5 percent from 3.0 percent.
The NBH projects 3.3 percent average inflation for 2012, and the government sees 3.3-3.5 percent for the years to 2015 -- levels which would also mean that the country is unlikely to join the euro zone before the second half of this decade.
Setting the inflation target has been the central bank's exclusive jurisdiction since 2007. A review of the target is due next year. Analysts said the new Monetary Council was likely to lift the target, as that would allow it to loosen.
Q: What else can change in monetary policy?
A: Three months ago, the NBH batted back government suggestions that the bank should use monetary stimulus to help the economy recover.
Economy Minister Gyorgy Matolcsy said the NBH should buy corporate bonds, primarily those of the state development bank MFB, in the secondary market to help provide liquidity to the economy and foster economic growth.
The bank has said that monetary stimulus measures could further lift inflation and that the government had more efficient fiscal policy tools to stimulate economic growth.
The new Monetary Council could adopt the idea of monetary stimulus.
Q: What can the changes mean to markets?
A: The conflict between the government and the NBH has already contributed to pressure on the forint and Hungarian government bonds and could further increase market volatility if the euro zone debt crisis keeps investors wary of economies where they see fiscal vulnerabilities.
Hungary's risk assessment hinges on developments in the euro zone and the details of the promised savings package, while bad news about the NBH can magnify volatility, analysts said.
Hungarian governments have tended to intervene in central bank affairs in the hope they can achieve looser monetary policy. But past developments, including an enlargement of the Council in 2005, showed new appointees acted independently when the panel decided on interest rates, analysts say.
If the inflation target is raised, that may in itself dent the NBH's credibility and lead to a weakening of the forint and a rise in long-end government bond yields.
Monetary stimulus is also a risk to markets as it may increase inflation pressure, while the impacts are unpredictable as the government has not detailed its idea. (Reporting by Sandor Peto; editing by Stephen Nisbet)