Hungary’s rate rises “half-hearted”, Urban Assistant said when Seabank meets with Reuters

© Reuters File Photo: Marton Nagy, Deputy Governor of the National Bank of Hungary, took part in an interview with Reuters in Budapest, Hungary, on May 23, 2017. Reuters / Christina Than

By Krisztina Than and Gergely Szakacs

BUDAPEST (Reuters) – Hungary’s central bank on Tuesday faced government pressure to raise interest rates more sharply as it met to determine its policy response to inflation, which has reached a nine-year high.

Marton Nagy, chief economic aide to Prime Minister Victor Urban, said the austerity cycle introduced by the central bank was “half-hearted” compared to the Urban government’s massive financial stimulus, leading to policy deviations.

The bank was moving away from its sympathetic position instead of being “really tough” in the face of rising inflation, which Nagy said could be between 4% and 5% over the next 18 months.

“I would assert that there is indeed financial dominance because monetary policy is not sufficiently active, only semi-active. Strength is half-hearted,” Nagy, a former deputy governor of the central bank, told a business conference.

The central bank is expected to raise interest rates by 15 basis points to 1.8% on Tuesday.

However, some analysts say that the September inflation print is 5.5% and there is a possibility of a larger-than-expected increase after the Czech Republic and Polish growth, which no analyst has predicted.

On Tuesday, Hungary’s front strengthened as some market players began to price that potential, traders said.

Trading on the weak side of the original 36060 mark, Forint has surrendered almost all of its profits since the bank began raising rates in June after slowing down even after lifting its inflation forecast last month.

Finance Minister Mihali Varga had earlier said at the same conference that tightening rates starting in June was “justified”, adding that it remains to be seen whether the current rise in inflation is a temporary or permanent event.

Pre-election handouts

Urban, who faces the prospect of a close election next year after three consecutive landslides since 2010, has offered voters a handout in defiance of the central bank’s call for financial restraint, maintaining policy alignment year after year.

Nagy said Hungary’s fiscal stimulus would be worth about 15% of GDP in the fourth quarter of this year and the first quarter of 2022, and that the government’s treasury account had a .5.5 trillion forint (14 1.14.5 billion) in the financial buffer.

He said the budget deficit would be kept at the planned GDP level of 7.5% this year and 5.9% of GDP next year, while economic growth could reach 6%.

(1 = 309.09 forint)

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