Gergely Szakacs and Krisztina Than

BUDAPEST, (Reuters) – The government pressured Hungary’s central banks to raise interest rates faster on Tuesday as they meet to discuss their policy response to an inflation spike that reached a record nine-year high.

Marton Nagy was the chief economic adviser to Viktor Orban. He said that the tightening process the central bank initiated was only half-hearted compared with Orban’s massive fiscal stimulus, which resulted in policy divergence.

In view of rising inflation, Nagy stated that the bank would be reducing its accommodative approach rather than “genuinely tightening” in order to reduce risk.

“I believe there is fiscal dominance because the monetary policy isn’t sufficiently active. It is just half-active. Nagy was a former Deputy Governor of the central bank and spoke at a business conference.

Expect the central bank to raise interest rates by 15% on Tuesday.

Analysts believe there is a chance for a bigger increase given the September inflation print of 5.5%, after an unexpectedly large hike in Poland and Czech Republic, and after which analysts have not predicted a Polish hike.

The forint of Hungary firmed on Tuesday as market participants began to price this possibility, traders stated.

After the Bank slowed its pace of tightening, despite raising its inflation forecasts last month, trading has been on the low side of the crucial 360 mark.

Mihaly Varga, Finance Minister, stated earlier at the conference that rate-tightening began in June and was justified. He added that it remains to be determined if the current increase in inflation is temporary or permanent.

PRE-ELECTION HANDOUTS

Orban is in danger of losing a tight election after three consecutive landslides that have occurred since 2010. He has given voters cash to defy central bank demands for fiscal restraint. This will upend years of policy alignment.

Nagy indicated that Hungary’s fiscal stimulation would amount to about 15% of GDP over the fourth and first quarters of 2018 and 2022 respectively, and that fiscal buffers were held on the Treasury accounts by the government worth 4.5 billion forints ($14.56billion).

According to him, the budget deficit will be maintained at 7.5% GDP this year and 5.9% GDP next year. Economic growth could rise up to 6%.

$1 = 309.09 Forints