ECB’s wage tracker indicates steep slowdown likely this year
The central bank’s wage tracker predicts salaries will rise by an annual 1.5 per cent in the fourth quarter
[FRANKFURT] The European Central Bank’s (ECB) indicator of future pay growth continued to signal a sharp slowdown in 2025, backing a further retreat in inflation that may allow more interest-rate cuts.
The ECB’s wage tracker, published on Wednesday (Mar 12), predicts salaries will rise by an annual 1.5 per cent in the fourth quarter. That’s unchanged from the projection seen in January, and way down from the 5.3 per cent peak recorded a year earlier.
“The steeply downward trend of the forward-looking wage tracker in 2025 partly reflects the mechanical impact of large one-off payments – that were paid in 2024, but drop out in 2025 – and the front-loaded nature of wage increases in some sectors in 2024,” the ECB said.
The central bank lowered borrowing costs this month for the sixth time since June as inflation abates and the economy wobbles. But while it signalled a continued bias towards more reductions, it suggested that its easing phase may be nearing an end.
Markets have pared bets on rate cuts this year after European countries revealed plans to significantly increase defence outlays, with Germany also unveiling large-scale investments into infrastructure. Traders no longer fully price two more quarter-point decreases in the ECB’s deposit rate, which currently stands at 2.5 per cent.
“We never saw a wage-price spiral in the euro area,” said Katharine Neiss, chief European economist at PGIM Fixed Income. “Recent data are confirming this. Wages are slowing down significantly. This underpins hopes that services inflation will also come down substantially soon.”
President Christine Lagarde said after last week’s decision that she’s “particularly attentive to wages in all their dimensions”. While they are still adjusting to the past inflation surge, recent negotiations “point to a continued moderation in labour-cost pressures”, she said.
Like the ECB’s tracker, which helps officials assess how best to tweak policy, other data – including compensation per employee, negotiated wages and a gauge calculated by employment website Indeed – have recently pointed to a significant slowdown.
The ECB’s confidence in reaching its 2 per cent inflation goal in early 2026 rests on the expectation that pay increases moderate and inflation in the labour-intensive services sector abates. The latter dipped to 3.7 per cent from 3.9 per cent in February, but remained close to 4 per cent annualised in the last three months. BLOOMBERG
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