Double-digit salary increases, well above the average growth rates in the European Union, have raised concerns among policymakers in Central Europe, fearing a return of inflation as the region’s economic recovery gains momentum.
The Czech National Bank will slow down the pace of interest rate cuts, as wage growth and consumer demand increase the risks of inflation, following a slowdown in the easing pace by the Hungarian central bank last week.
Inflation in Central Europe surged following Russia’s invasion of Ukraine in 2022, impacting economic growth, but has since eased at the beginning of this year, allowing central banks to normalize monetary policy.
Hourly wage costs in the first quarter varied from a 16.4% annual increase in Romania to 5.9% in the Czech Republic, exceeding the EU average of 5.5% and the eurozone average of 5.1%.
Polish wage costs rose by 14.1% in the first quarter, among the highest in the EU, driven by significant minimum wage hikes.
The European Commission forecasts Polish inflation to remain steady at 4.2% next year, the highest level in the EU.
The Czech Republic is expected to see inflation levels slightly above 2% this year and next, with rising wage growth identified as a key risk to inflation prospects.
The Hungarian National Bank, which made a modest 25 basis point cut to 7% last week, the smallest cut in a 14-month easing cycle totaling 1,100 basis points, also pointed out wage increases as a threat to inflation.
In Romania, rapid wage cost growth and loose fiscal policy have prevented cuts from its key rate of 7%, one of the highest in the bloc.
While wage growth is a positive sign of economic recovery, it also poses challenges for inflation management in Central Europe, prompting central banks to reassess their monetary policy strategies in the face of evolving economic conditions.
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