Hungary central bank chief, finance minister spar over inflation-hit economy

EGER, Hungary (Reuters) - Hungary's central bank signalled caution on further rate cuts on Thursday while the government flagged a higher deficit and a new tax on banks to offset a drop in tax revenue as the highest inflation in the European Union hobbles the economy.

The suggestion of a new tax on Hungary's banks, about half of which are foreign-owned, sent shares in central Europe's largest independent lender, OTP Bank, down by as much as 7% on the Budapest Stock Exchange by 0956 GMT.

The National Bank of Hungary (NBH) raised its main, one-day deposit, rate to the highest level in the EU at 18% last October to shore up the forint as it hit record lows.

It is expected to finish unwinding that tightening at a policy meeting on Tuesday with a further 100 bps cut to 13% but Governor Gyorgy Matolcsy, speaking at an economic forum, signalled a gradual and data-driven approach in the following months amid continued risks in the global economy.

Sitting alongside Finance Minister Mihaly Varga, the two traded blows on the fallout of the inflation crisis, with Matolcsy slamming government price caps, which he said had backfired, while Varga said the bank's decision to stop hiking the base rate last September led to sharp falls in the forint.

"Far from supporting the central bank's fight against inflation, in 2021 and 2022 the government heaped fuel on the flaming house of the economy with high deficits and price caps," Matolcsy said, adding that annual inflation could slow to 7% by December from a peak of 25% in the first quarter.

He said the inflation surge, which pushed Hungary's economy into its longest recession since modern records began, stalled growth in value-added tax revenue, a mainstay of the Hungarian budget, compared with expectations for a double-digit increase.

Varga said Prime Minister Viktor Orban's government was reviewing a 2023 budget deficit goal of 3.9% of gross domestic product. While not specifying a new target, he said the shortfall would be below last year's level of 6.1% of GDP.

For next year, the government is still aiming for a deficit of 2.9% of GDP and a decline in government debt, Varga said, adding the government saw average annual inflation at 6% next year.

He said the government could consider imposing a new tax on banks, which have made record profits due to high interest rates, and suspend new investment or freeze spending at ministries if needed to rein in the budget deficit.

(Reporting by Gergely Szakacs and Krisztina Than; Editing by Gareth Jones, Kirsten Donovan)

By Gergely Szakacs and Krisztina Than