IMF Warns of Inflation Risks as Central Europe Negotiates 2024 Wage Deals

By Gergely Szakacs

BUDAPEST (Reuters) – Planned significant increases in the minimum wage for next year in Central Europe may lead to more persistent inflation or job losses, given the region’s relatively weak productivity growth, the International Monetary Fund (IMF) has warned.

With inflation decreasing from double-digit figures, the economies in the region are at a pivotal moment as falling price growth boosts real wages, which governments hope will stimulate consumption and facilitate broader economic recovery next year.

However, this potential benefit could pose risks if companies choose to pass increased wage costs onto consumers through further price hikes.

The Polish minimum wage, currently the highest in the region according to Eurostat data, is expected to rise by about 20% next year. Meanwhile, Romania’s government has already increased the minimum wage by 10% starting in October, and Hungary has indicated a potential increase of 10% to 15%.

The Czech government is also contemplating a raise of 9% to 12%, which would exceed the anticipated inflation rate for next year. This comes after a prolonged period of declining real wages that has weakened demand and led to a sustained economic downturn this year.

In response to slowing price growth, some central banks in the region have lowered interest rates, particularly in Poland and Hungary, although both countries are still expected to experience inflation rates above their policy targets in the coming year.

While minimum wages have generally increased in line with inflation since 2019, caution is necessary looking forward, according to Geoff Gottlieb, the IMF’s Senior Regional Representative for Central, Eastern, and South-Eastern Europe. He stated, "In some countries in the CEE region, large additional increases in the minimum wage are planned for 2024."

He added that while firms might absorb higher wages by lowering profits, there’s also a risk that these increases could lead to more enduring inflation or decreased employment, especially considering the region’s modest productivity growth.

Recent data from the Organisation for Economic Co-operation and Development (OECD) indicated that labor productivity in Central Europe’s key economies does not match the OECD average, with Poland performing the best and Romania the worst.

For an optimal approach, Gottlieb emphasized that fiscal policy and forms of social protection should support lower-income workers rather than relying solely on minimum wage increases. He mentioned that nominal wage growth in Central Europe, characterized by some of the European Union’s tightest labor markets, remains "very strong" and needs to decrease further for inflation to return to central bank targets.

"Aggregate demand must change in a way that makes firms less inclined to pass on price increases. Thus, it’s crucial that macroeconomic policies do not loosen prematurely or excessively," he explained.

The National Bank of Poland has decreased interest rates by a total of 100 basis points over the past two months in anticipation of the October 15 parliamentary elections, with another cut of 25 basis points to 5.5% expected on Wednesday.

In Hungary, the central bank lowered its base rate by a more significant-than-expected 75 basis points last month, continuing an easing trend started in May that has seen rates reduced by a total of 575 basis points to 12.25%—the highest benchmark in the EU.

Contrarily, last week the Czech National Bank held its key rate steady at 7%, contrary to market expectations for a cut, citing wage-related inflation risks and highlighting the need for restraint in wage negotiations.

Romania’s central bank is also likely to maintain its rates unchanged at 7% on Wednesday, having noted concerns about high and concerning double-digit wage growth impacting inflation.