Hungary is considering imposing higher 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 on the plan.
(Bloomberg) — Hungary is considering imposing higher 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 on the plan.
Record bank earnings expected this year will allow the government to consider raising taxes on lenders further, Finance Minister Mihaly Varga told economists on Thursday. Defense procurements may also be delayed and interest-rate subsidies reduced, while potentially raising the budget gap goal for this year from 3.9% of gross domestic product, Varga said.
Prime Minister Viktor 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 a miss in targeted value-added tax revenues while the bloc’s highest borrowing costs restrained business activity during a continuing recession.
Shares of OTP plunged as much as 8% after Varga floated the idea of raising taxes on banks, the biggest drop in six months.
Hungary already imposed an extraordinary tax on lenders last year to plug budget holes after record pre-election spending. The sector is dominated by OTP, followed by MBH Bank Nyrt., which emerged out of the fusion of three banks, as well as the units of western 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 will help reduce the headline rate to 7% in December. The forecast led to a drop in the forint as traders including Miklos Kolba of ING Bank Hungary said it may lead to steeper rate cuts over the coming months. The forint weakened 0.7% against the euro by noon in Budapest, the biggest drop among 23 emerging market currencies.
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.
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