Although economic activity remains weak and forecasts are moving in the right direction, the European Central Bank remains uncomfortable with cutting interest rates at a time when wage growth is high. Today’s decline should bring some relief to those hoping for a gradual cycle of cuts, as the negotiated 3.6% year-on-year wage increase is more in line with a positive inflation outlook over the medium term.
However, given weak productivity growth, wage growth remains too high for the 2% inflation target. However, forward-looking indicators still point to wage growth moderating over time as purchasing power is expected to recover further and economic activity to remain moderate. Some expected productivity gains should further ease inflationary wage pressures in the medium term.
Still, the road to fair wages could be a bumpy one, with an unexpected upturn still possible in the second half of 2024, especially as unions in Germany continue to demand higher wages at the start of negotiations. There is. While this is great for consumers and should lift the economic outlook somewhat, it could be a curve ball for the ECB later this year.
However, for September, the barrier to further rate cuts appears to have been removed. ECB President Christine Lagarde has already stressed her satisfaction with wage growth expectations and the fact that profits are absorbing higher wage growth. Today’s figures show a slowdown in wage growth, and expectations for a 25 basis point cut in September are becoming increasingly firm.
