Hi, this is Andrea Dudik in Prague. Welcome to our weekly newsletter on what’s shaping economics and investments from the Baltic Sea to the Balkans. You can subscribe here.

Applying Pressure

Hungarian central bank Governor Mihaly Varga started the year as a loyal member of Prime Minister Viktor Orban’s cabinet. Now he finds himself where his predecessor often used to be: Under pressure to tailor monetary policy to politics.

The peaceful coexistence between the government and the central bank, so welcomed by markets after years of tension and unpredictability, abruptly ended this week when Orban and then Economy Minister Marton Nagy said interest rates were too high. Both told policymakers they had room to cut the benchmark without hurting the currency.

Varga’s team pushed back, but the damage was already done, as my colleagues Zoltan Simon and Marton Kasnyik in Budapest reported. The forint plunged as Hungary was thrown back to the days of former central bank chief Gyorgy Matolcsy, who spent the first part of his term supporting Orban and the latter part fighting him.

The desire for lower borrowing costs comes as Orban’s Fidesz party trails in the polls ahead of an election in April. To keep voters onside, the five-term premier has promised all kinds of handouts, from a double-digit minimum wage hike to more subsidized loans to businesses.

Mihaly Varga, governor of the National Bank of Hungary, used to be Orban’s finance minister. Now he’s in a different spotlight.  Photographer: Akos Stiller/Bloomberg

But the economic revival Orban is promising looks far away. Inflation has remained stubbornly above the central bank’s targeted range for nearly a year and Varga has backed a hawkish monetary policy since taking over the central bank in March.

Opposition leader Peter Magyar poured cold water on Orban’s plan to jumpstart economic growth, saying that will only happen if there’s a change of government. Only then, he said, can Hungary again embrace predictable policies and regain access to European Union funding it lost under Orban.

Indeed, until this week, Magyar’s plan to reset relations with the EU had been accelerating a rally in the forint, as my colleague Andras Gergely reported earlier. There’s a long way to go before the vote, and Orban might still win. The currency market will be watching.

Around the Region

Ukraine: Russian strikes in recent days have wiped out more than half of the country’s domestic natural gas production, likely forcing it to spend 1.9 billion euros ($2.2 billion) on fuel imports to endure the winter. 

Poland: The central bank unexpectedly cut interest rates for a fourth time this year in a signal that policymakers expect inflation to remain contained despite higher spending by the government.

Czech Republic: Billionaire Andrej Babis, whose party won last weekend’s election, said the next government may need to increase the budget deficit to meet spending priorities. His victory, meanwhile, was a boon for the populist right in Europe.  

Kosovo: The government in Pristina defended its purchase of Turkish-made kamikaze drones after Serbian President Aleksandar Vucic accused Ankara of violating international law, further straining relations in the Balkans.

Latvia:  Prime Minister Evika Silina said she welcomed the EU’s plan to set up a so-called drone wall along its eastern border, but called the idea “very raw.”

Chart of the Week

Private equity firms investing in the region have found it tough of late to raise money because of dwindling investor appetite, according to Pawel Borys, managing partner at MCI Capital in Warsaw. The firm is gearing up for new opportunities amid that drop in competition. Valuations are still below Western European peers, and one industry that’s particularly attractive is health care, Borys, who served as an economic aide in the previous government, said in an interview.

By the Numbers

• Romania kept its benchmark interest rate at 6.5% again, with borrowing costs remaining at among the highest in Europe. They’re likely to stay there at least until the end March to help contain an inflation spike, a central bank board member told Bloomberg.
• Serbia held rates for a 13th month at 5.75% even after President Vucic pre-empted an official data release to say that inflation had dropped to below the central bank’s target.
• Smyk Holding SA, a retailer of toys and children’s apparel, is planning an initial public offering in Warsaw that will test appetite for listings amid the best year for Polish stocks since 2009.

Things to Watch

• The EU Council is expected to announce its decision on raising import quotas for certain Ukrainian agriculture products such as honey and sugar.
• Meanwhile, Ukraine’s finance minister and central bank governor will visit Washington for the International Monetary Fund’s annual meeting to discuss new program for Kyiv.
• Czech election winner Babis will continue to hold talks to reach a coalition agreement with two parties, including the far right.

Final Thought

The region’s airspace has been the subject of a lot of scrutiny recently thanks to Russian jets and drones. Last weekend, almost 6,000 travelers were impacted at Vilnius Airport by something rather different, though: Weather balloons with smuggled cigarettes crossing the border from Belarus. Sending contraband into Lithuania this way isn’t uncommon. Balloons fly at high altitudes and can confuse radar. But with two of them passing over the airport — many more crossed the city — authorities said they had to close the airspace for more than six hours.

The city skyline in Vilnius. Balloons containing smuggled cigarettes crossed the city last weekend.  Photographer: Andrey Rudakov/Bloomberg

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