(Bloomberg) -- Hungary’s finance minister may propose raising taxes on banks after a year-long recession and the fastest inflation in the European Union blew the country’s budget off course. Shares in OTP Bank Nyrt., the country’s largest lender, plunged.
Record bank earnings expected this year may prompt the government to expand a windfall tax on lenders, Finance Minister Mihaly Varga told economists on Thursday. It may also delay defense procurements and reduce interest-rate subsidies, as well as potentially raise this year’s budget gap goal from 3.9% of gross domestic product, he said.
It was unclear whether Varga, a long-time ally of Prime Minister Viktor Orban, has wider support for his proposal. Mate Kocsis, the leader of the ruling Fidesz party’s parliamentary caucus, said the government won’t raise the bank tax or phase out interest-rate subsidies because they run counter to its goal of boosting lending, the state MTI news service reported. Kocsis spoke after a two-day party meeting that Orban also attended.
Orban is struggling to close a budget gap that exceeded a record $9 billion this year through August. Inflation peaked at more than 25% in January, hitting domestic demand and causing value-added tax revenue to undershoot the target. The bloc’s highest borrowing costs also restrained business activity during a continuing recession.
Shares of OTP plunged as much as 8.2% after Varga floated the higher bank tax, the biggest drop in six months. It clawed back about half of the loss after Kocsis’s statement.
Countries around the world are imposing extra levies on banks as a surge in official interest rates, aimed at reining in inflation, boosts lending margins and lenders’ profits. Italian Prime Minister Giorgia Meloni, for example, is planning to impose a windfall tax on the financial sector to net about €3 billion ($3.2 billion) for the budget.
Hungary already imposed an extraordinary tax on lenders last year to plug a hole in the budget after record pre-election spending. The sector is dominated by OTP, followed by MBH Bank Nyrt., which emerged from the fusion of three banks, as well as the units of larger European lenders including Erste Group Bank AG, Raiffeisen Bank International AG, UniCredit SpA and KBC Group NV.
Varga’s comments about another round of fiscal consolidation came during a heated exchange with central bank Governor Gyorgy Matolcsy, who blamed “maverick” economic policies and a loose budget for fueling inflation and making Hungary one of the most vulnerable economies globally.
He said inflation has improved after a period of strict monetary policy he has presided over, which he expects to help reduce price growth to 7% in December. The forecast led to a 0.9% drop in the forint by noon in Budapest — the biggest decline among 23 emerging market currencies tracked by Bloomberg — as traders including Miklos Kolba of ING Bank Hungary said it may lead to steeper rate cuts in the coming months.
The central bank is poised to cut the key interest rate by a full percentage point for a fifth month on Tuesday, bringing it to 13%. Matolcsy reiterated the central bank’s guidance that further cuts would be “data-driven, cautious and gradual.”
“The forint isn’t helped by the speeches that once again highlighted the differing visions of the government and the central bank on inflation and growth on the one hand and the potential increase of the budget deficit and taxes on the other,” Zoltan Varga, an economist at Equilor Zrt. brokerage in Budapest, said in a research note to clients.
--With assistance from Marton Kasnyik.
(Updates with ruling party official in third paragraph, OTP share in first and fifth.)
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