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Fall in gross wages makes central bank rate cut more likely

A drop in twelve-month gross wages in October - for the first time since January - makes a 50bp rate cut by the National Bank of Hungary's Monetary Council in December all the more likely, analysts told MTI on Wednesday.

Twelve-month gross wages fell 1.6% in October after inching up 0.7% in September, the Central Statistics Office (KSH) said in the morning. Net wages rose 1.4% yr/yr in the twelve months to October and real wages dropped 3.2%.

Raiffeisen Bank's Zoltán Török said the growing difference between gross and net wages shows the changes to the personal income tax system this year.

Falling real wages will reduce domestic demand event further, lessening inflationary pressure, Török said. In spite of the drop in demand, twelve-month CPI could rise to 5.7% in December, but will fall under 3% in the second half of 2010, he added.

The slowdown of wage growth in the private sector in October - twelve-month gross wage growth slowed to 3.5% from 4.3% in September - gives the NBH rate-setters good reason to cut rates by 50bp, as expected, at a meeting next week, Török said.

Gergely Suppan of Magyar Takarékszövetkezeti Bank said real wages last fell by a similar amount in 2006, but Hungarians compensated for the drop in earnings by borrowing. Now, this is no longer an option because of the uncertain economic outlook and tighter lending conditions, he added.

Suppan put year-end twelve-month inflation at 5.6%-5.7%, but said CPI could fall under 3% from July 2010, bringing average annual inflation to 3.8%.

The wage data will give central rate-setters opportunity to cut the base rate by 50bp to 6.00% at their December meeting, he said. The rate should be cut to around 4.00% in light of the macroeconomic conditions, but there is not a chance for this now, he added. (MTI-Econews)