What's Happening? IMF General Warning Inflation Risk In Central Europe


 A big increase in minimum wage rates planned in Central Europe for next year raises the risk of more lasting inflation or job losses due to weak productivity growth across the region, the international monetary institution (IMF) has warned.

With inflation rates down from double-digit levels, economies in the region are at a turning point as declining price growth pushes real wages back into positive territory. This is expected to help wider consumption and economic recovery in the coming year.

However, the expected benefits to the region's economy have slowed significantly or even shrunk due to high inflation. This could pose a risk if companies increase wage costs.

Poland's minimum wage, which is the highest in the region, is expected to rise by 20% next year. The Romanian government has increased the minimum wage by 10% since October, while Hungary has signaled an increase of 10% to 15%.

Several central banks in Europe have responded to weak price growth by lowering interest rates.

The latest data from the Organization for Economic Co-operation and Development (OECD) shows that labor productivity in Central Europe's major economies is below the OECD average, with Poland performing best and Romania the opposite.

To strike the right balance, Gottlieb, who is the main representative of the IMF, said fiscal policy and other forms of social protection should be the main tools to support low-income workers. He also said overall nominal wage growth in Central Europe has some very strong European union labor markets and needs to slow further for inflation to return to the central bank's target.

Poland's National Bank, which has cut interest rates by 100 basis points over the two months before parliamentary elections on October 15, is expected to cut borrowing costs by 25 basis points to 5.5% on Wednesday. Hungary's central bank has cut its base rate by 75 basis points more than expected last month, extending an easing campaign started in May that has seen rates fall by 575 basis points to 12.25%.

In contrast, the Czech National Bank left its base rate at 7% last week, defying some market forecasts for an interest rate cut by referring wage-related risks to inflation and calling for caution in wage agreements. The National Bank of Romania is also likely to keep rates at 7% on Wednesday.