Hungary’s fast Feb wage growth points to rate hike

Analysis

Hungarian wage growth accelerated sharply in February after a slowdown in January, which analysts said could prompt the central bank to raise interest rates further, possibly as soon as April.

The Central Statistics Office (KSH) said on Thursday that wage growth picked up in February as private sector wage growth rose, particularly in the financial and real estate sectors. Gross average wages grew by an annual 13.4% in February after a 1.5% drop in January and gross wage growth in the private sector picked up to 14.4% from 9.7% in January.

Analysts said accelerating wage growth indicated a threat of rising inflation expectations, and the central bank will have to carefully weigh the disappointing data against recent inflation figures and a strong forint when it decides about rates later this month.

Hungary’s annual inflation had slowed to 6.7% in March from 6.9% in February, while the forint has been trading at relatively strong levels of about 253 to the euro recently, which can help reduce inflation. “Wage costs will exert large upward pressure on prices if this trend continues,” said Zsolt Kondrat, analyst at MKB. “The figures are bad news for the central bank, which has to weigh the effect of a stronger exchange rate against the mounting evidence of growing inflation expectations. The chance for further rate hikes increased,” he added.

The central bank has said it would watch wage figures closely this year as it fears that last year’s surge in inflation on one-off shocks could boost inflation expectations. It hiked interest rates by 50 basis points to 8.00% in March and analysts said a further rate hike could come already at the bank’s next rate setting meeting on April 28. “Previous comments from the central bank highlighted the importance of this year’s wage data in shaping monetary policy and current data point for more rate hikes rather than less,” said György Barcza, analyst at KBC’s Hungarian unit. “In light of this, a further 50 basis point rate hike to 8.5% could still be needed, even though forint recovery eases some of the risks about inflation,” he added.

In the public sector, wages grew by 11.8% after a 14.6% drop in January when base figures were especially high. “Gross wage growth in the financial sector was almost 34% while real estate sector wages rose 15%,” KSH statistician Erika Molnárfi said. Ex-bonus private sector gross wages grew by 10.4% in February, compared with 8.7% in January, and the KSH said this jump was partly due to a rise in real estate sector wages as a result of an increase in legal employment in the sector. Real wages in the first two months of the year fell by 1.7%. (Reuters)

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