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MNB sees ‘moderate’ impact of wage hikes on inflation

The National Bank of Hungary (MNB) played down the impact of steep wage growth on inflation in its quarterly Inflation Report released Thursday. At the same time, Minister for National Economy Mihály Varga said the government plans to cut payroll tax by 2.5 percentage points next year, rather than 2.0.

"The upward pressure on costs from wage increases is offset by the decline in the social contribution tax and the corporate income tax, progress in combating the shadow economy and the weakened relation between labor costs and prices in the post-crisis period," the MNB said in its report.

This year, the government already reduced payroll tax by 5 percentage points from 27% to 22%, and the corporate tax was cut to 9%, state news wire MTI recalled. The reductions were paired with marked rises in minimum wages for skilled and unskilled workers, as outlined in an agreement the government reached with employers and unions late last year. Under the terms of the agreement, the minimum wage will rise further next year, while the payroll tax is cut another 2.5 percentage points.

Varga made the announcement of the increased cut after a meeting of the National Competitiveness Council, a body of business leaders and experts established to make recommendations to the government.

The scale of the payroll tax cut hinges on wage growth climbing over 11% in January-September of this year, a rate the MNB said it expects will be exceeded. Gross wages were up 13% year-on-year in July, and 12.6% in January-July, latest data from the Central Statistical Office (KSH) show.

The MNB raised its projections for full-year wage growth in the latest quarterly report to 12% for this year, 9.5% next year, and 6.5% in 2019.

The MNB also projected that labor costs in the business sector will rise at a slower pace than wage growth: by 7.0% this year, 6.6% next year and 6.9% in 2019.