IMF sees Hungary's GDP growth slowing to 3.5% next year

BUDAPEST, Dec 5 (Reuters) - Hungary's economic growth is expected to slow to 3.5% next year from 4.9% this year amid a global slowdown and declining European Union-financed investments, the International Monetary Fund said on Thursday.

The IMF also said in a report following consultations with Budapest that average inflation would be around 3.4% percent in 2019 and 2020, then move back towards the midpoint of the central bank's 2% to 4% tolerance band over the medium term.

The IMF said it was reassured by the government's medium-term fiscal targets, which it said would help alleviate demand pressures and "increase the available fiscal space that can be used in future downturns."

"Directors encouraged specific growth-friendly revenue and expenditure measures," the IMF said. These could include broadening the tax base, and containing the public wage bill.

Wages have grown by double digits in Hungary in the past few years, as the country -- along with its neighbours in Central Europe -- has struggled with a chronic labour shortage amid robust economic growth.

"Wages outstripping labour productivity growth, slower export growth, and shortcomings in the business environment for SMEs call for invigorating structural reform efforts," the IMF said.

Hungarian interest rates are the lowest in central Europe and the National Bank of Hungary affirmed its accommodative policy stance last month, saying downward inflationary pressures from the euro zone would help keep a lid on domestic inflation.

"Monetary policy can afford to stay on hold in the near term given the ongoing easing by major central banks, and the still weak external outlook and downside risks but should continue to be attentive to domestic demand pressures," the IMF said.

It also said, however, that a close monitoring of the housing market was warranted and the bank should consider scaling down existing incentives that stimulate demand. (Reporting by Krisztina Than, editing by Larry King)