Q1 real GDP rose by +4.4% y/y, the same pace as in Q4 2017, driven by strong domestic demand. Consumer spending was up by +5.1% y/y in Q1, public spending +4.6% and fixed investment +17.1%, though a reduction in inventories subtracted -2.3pp from growth. External trade activity weakened overall and made a neutral contribu¬tion to Q1 growth, with exports up by +3.5% y/y and imports +3.8%. Strong consumer spending has been fueled by falling unemployment (3.8% in April) and rapid nominal wage growth (+12.4% y/y in Q1). However, the latter combined with higher oil prices has pushed up CPI inflation to a 15-month high of 2.8% y/y in May, and we expect it to rise further in the coming months. Nonetheless, the Monetary Council kept its key policy interest rate (3-month deposit rate; +0.9%) and the overnight deposit rate (-0.15%) again unchanged this week. However, markets appear to have realized the emerging overheating risk: the HUF has fallen by -3.4% against the EUR since end-April, more than any other currency in Central Europe. We expect monetary tightening to come in early-2019, at the latest.
