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MNB lowers 2019 CPI forecast on falling oil prices

The National Bank of Hungary (MNB) has lowered its forecast for average annual inflation in 2019 to 2.9%, citing falling oil prices, the central bank said in its quarterly Inflation Report released Thursday. As revealed in a flash report earlier in the week, the MNB has also revised its forecast for 2018 economic growth upwards to 4.7%.

"We expect lower inflation than our September forecast as a result of the major fall in oil prices observed from mid-October," the MNB said in the report. The forecast was lowered from 3.1% in the September Inflation Report. 

The central bank said inflation would rise temporarily early in 2019, then decline again from April due to the base effect of fuel prices. It put CPI at 3.0%, level with its mid-term target, in both 2020 and 2021.

The MNB forecasts core inflation, excluding indirect tax effects, will rise to 3.2% in 2019, lifted by "robust" domestic demand, before falling to 3.1% in 2020, and 3.0% in 2021. 

The report noted that the tax content of inflation would gradually increase until September 2019, when the impact of excise tax hikes for tobacco products drops out of the base. This excise tax will be raised again in January and July of 2019, but the MNB expects faster pass-through than observed earlier. The impact of other tax changes, such as a lower VAT rate for heat-treated milk and limited exemptions from the financial transaction levy, is "moderate on the whole," the central bank added. External inflation is assumed to "remain moderate."

The MNB said volatile factors, such as fuel and unprocessed food prices, had affected inflation in the recent period.

"The higher volatility of inflation is expected to persist over the short term," said the report. "Therefore, on the monetary policy horizon, developments in the underlying measures capturing persistent inflationary trends deserve even more attention than
usual in assessing the sustainable achievement of the inflation target."

GDP growth set to slow

The MNB forecasts GDP growth will slow from a projected 4.7% in 2018, to 3.5% in 2019, and 3.0% in both 2020 and 2021. The central bank expects household consumption to continue to grow, supported by high net financial wealth, strong consumer confidence, and the second-round effects of the pickup on the home market, but it augured a deceleration as real wage growth slows.  

The MNB projected an increase in private investment over the entire forecast horizon, driven by big investment projects by BMW, Daimler and oil and gas company MOL, high capacity utilization, the tight labor market, a central bank program that aims to raise the proportion of long-term, fixed-rate lending to SMEs, and higher household investments. 

Despite subdued growth on Hungaryʼs main export markets, exports are not expected to slow because of an increase in Hungaryʼs export market share, the MNB noted. 

The central bank observed that reforms that serve to boost the competitiveness of the economy are "increasingly important" for sustainable, long-term economic growth.

Wage growth to decelerate

The MNB projects that gross wage growth will slow from an expected 11.0% in 2018, to 8.5% in 2019, and 6.9% in both 2020 and 2021.   

Annualized wage growth has been in the double digits since early 2017, after an agreement was reached by employers, unions and the government on big minimum wage increases paired with payroll tax cuts. Minimum wage rises for 2017 and 2018 were spelled out in the agreement, but employers and unions have yet to agree on the increase for 2019.

Minister of Finance Mihály Varga said earlier that the government would decide the scale of the rise if the sides fail to seal a deal before yearʼs end.

The central bank noted that the decline of the wage share to a historical low had made possible the rapid wage growth seen in recent years. Now that the wage share has caught up with its historical average and companiesʼ leeway in wage setting is narrowing, wage growth will increasingly be determined by productivity and competitiveness in coming years, it added.