The Monetary Council (MC) of Hungary kept its key policy interest rate (3-month deposit rate; +0.9% since May 2016) and the overnight deposit rate (-0.15%) again unchanged this week, even though consumer price inflation had risen to a near-six-year high of 3.8% in October. The MC argued that volatile items such as fuel and food prices drove up headline inflation while core inflation remained more moderate at 2.6%. It expects the headline rate to ease somewhat and remain within its 3% ± 1pp target range in the next months. Euler Hermes projects average annual inflation of 3.3% in 2019, but a still overheating labor market poses some upside risk to this forecast. As the unemployment rate came in at 3.8% in Q3 2018 (+0.2pp q/q; -0.2pp y/y), nominal wages rose by a still high average +11.2% y/y in July-August, after +11.3% in Q2 2018, though this is down from a peak of +14% in Q2 2017. The MC reiterated that it was prepared for a future normalization of its monetary policy and we expect it to tighten when needed.
