Eurozone wage growth slows, boosts case for another ECB cut

A KEY gauge of euro-zone wages eased – reinforcing the case for the European Central Bank to continue lowering interest rates next month.

Second-quarter negotiated pay rose 3.6 per cent from a year ago, the ECB said on Thursday (Aug 22). That’s down from 4.7 per cent in the previous three months and broadly in line with estimates from Bloomberg Economics, as well as analysts at Morgan Stanley and Citi.

German bonds pared their decline to leave the 10-year yield three basis points higher at 2.22 per cent. The euro slipped versus the US dollar, dropping 0.1 per cent to US$1.1139 after earlier rising to US$1.1164.

The data begin a three-week countdown to the ECB’s September meeting, where officials are expected to lower the deposit rate for a second time, following June’s initial move. In the meantime, officials will receive further details on workers’ pay, as well as this month’s inflation reading and economic projections through 2025.

While policymakers led by President Christine Lagarde left little doubt before their summer break that borrowing costs would fall further this year, lingering uncertainty has meant they haven’t committed to when and by how much.

“The pace of annual growth in negotiated wages in the euro area slowed sharply the second quarter. This will be welcome news for the ECB and keeps a September rate cut on the table,” said Maeva Cousin, senior global conomist. “Still, the persistent strength of underlying pay growth, notably in Germany, and sticky services inflation will likely keep policymakers cautious and support the case for gradual, quarterly cuts.”

The growth outlook for the eurozone’s 20-nation economy has since soured, with confidence slumping. Germany, the bloc’s largest member, saw output unexpectedly contract in the second quarter.

Such risks strengthen arguments to cut rates next month, according to Finland’s Olli Rehn, one of the first officials to speak following the ECB’s customary August hiatus. He reiterated that inflation’s path back to the 2 per cent target by end-2025 will be bumpy, though stressed that there’s been considerable progress since a peak of 10.6 per cent in 2022.

Aside from a slowdown in wage gains, the ECB’s inflation outlook needs corporate profit margins to absorb some of the rise in labour costs and productivity to improve. That last element has disappointed lately – fuelling concern that the ECB may be too optimistic.

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Even on wages, there have been some warning signs.

German salary growth is not abating quickly enough for the Bundesbank, which has warned that inflation may remain elevated for some time. Elsewhere, a tally by Citi’s Giada Giani showed that increases in negotiated pay eased in France, the Netherlands and Austria, but accelerated in Belgium, Italy and Spain.

ECB officials will not have to wait long to analyse a broader gauge of workers’ pay – compensation per employee. Those data are due on Sep six – less than a week before the rate decision. BLOOMBERG