EUROPEAN Central Bank president Christine Lagarde said rising salaries are becoming an ever-more significant factor as policymakers assess when they can begin lowering interest rates.

While disinflation is set to continue gradually in 2024, Lagarde told European Union lawmakers on Thursday (Feb 15) in Brussels that risks remain and policymakers need more assurance that price gains are headed back to the 2 per cent target.

“Wage growth continues to be strong and is expected to become an increasingly important driver of inflation dynamics in the coming quarters,” she said.

“The contribution of unit profits to domestic price pressures continued to decline, suggesting that, as expected, wage increases are at least in part buffered by profit margins.”

The remarks come as several of the world’s major central banks debate when they can safely start reversing the rate hikes they enacted to put a lid on inflation – without reigniting prices once again.

Officials in Frankfurt appear torn between an initial cut in April or June, though a majority has publicly backed the later date, keen to get more clarity on the development of salaries and corporate profits in the 20-nation eurozone.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

German bonds extended small gains after Lagarde’s comments, sending 10-year yields to a one-week low at 2.30 per cent, while money markets raised wagers on the scope for rate cuts to firmly favour five quarter-point reductions this year instead of four, with the first poised to come by June.

While the ECB’s forward-looking wage tracker continues to signal strong pressures, agreements indicate some levelling off in the last quarter of 2023, Lagarde said.

“Wage pressures for 2024 hinge particularly on the outcome of ongoing or upcoming negotiation rounds that affect a large share of euro area employees,” she said.

Executive Board member Isabel Schnabel recently warned against lowering borrowing costs too soon, citing sticky services inflation, a resilient labour market, looser financial conditions and Red Sea tensions as risk factors for prices.

On Wednesday, Bundesbank president Joachim Nagel said history suggests that it’s worse to loosen monetary policy too early than too late, warning of “a higher price in the end in economic terms” for moving prematurely.

More dovish officials fret about delaying too long, though, wary of worsening the plight of the struggling economy and maybe even falling short of the 2 per cent inflation goal that’s proved elusive since Covid lockdowns ended and Russia invaded Ukraine. Italy’s Fabio Panetta said at the weekend that policy easing will need to happen soon.

Many see inflation sinking more quickly than ECB projections currently suggest, with the headline number having plunged in 2023, though progress so far this year has been less notable.

The economy, meanwhile, narrowly avoided a recession in the second half of 2023: Eurostat data published Wednesday showed the eurozone stagnated in the fourth quarter after output fell by 0.1 per cent during the previous period.

Its prospects are weak, however. Economists surveyed by Bloomberg predict only expansion of just 0.5 per cent this year – the same rate as last year. BLOOMBERG