Wage growth slows in Hungary, feeling finally deflation

The Hungarian Statistical Office has published the September wage dynamic figure according to the gross wages increased by 2.4% Y/Y. No surprise - that was fully in line with our expectations. Wages filtered by the public fostered workers, the salaries went up by 4.4% Y/Y. The main massage of these figures is that the wage dynamic slowed down from around 6.5% Y/Y level to around 4% (this is without the fostered workers), so the economy started to defer to the lower inflationary environment, but still provides a substantial net real wage growth of about 2.5% Y/Y, which might be narrow to around 1.5% Y/Y in next year.
What does it mean for the economy and monetary policy? Recall that the National Bank of Hungary will hold rate setting meeting on 25th November. Although this decision looks to be quite obvious, namely the base rate may be kept unchanged at 2.1%, the market view started to change what may be the next movement of NBH. While the main expectations were that NBH may hike base rate in 4Q15, now the market started to price in 10bp cut for 1Q15.
In the view of NBH it may mean, that there is no inflationary or deflationary risk till end-2015, so they are in a comfortable situation during their decision making. The positive international sentiment pushed EURHUF below 305, which also gives room for NBH to loosen the monetary policy, but before the year end it is unlikely as the public debt level has to be kept below last year’s level of 77.2% of GDP. As the FC debt portion within the public debt is still high (around 38%) it is important that what the year-end exchange rate level is. In our view an ideal EURHUF rate from that perspective is around 302. Before the year-end NBH may not risk a base rate cut, because they may not want to weaken the currency. But the chance of rate cut in February increased especially if Poland cuts base rate and the international sentiment remains supportive at the beginning of next year.