Eurozone wage growth surges in test for ECB rate cuts

    • Eurozone third-quarter negotiated pay rose 5.4 per cent from a year ago.
    • Eurozone third-quarter negotiated pay rose 5.4 per cent from a year ago. PHOTO: BLOOMBERG
    Published Wed, Nov 20, 2024 · 06:49 PM

    A KEY gauge of eurozone wages jumped by the most since the common currency was introduced – complicating the European Central Bank’s plans for interest-rate cuts as inflation eases.

    Third-quarter negotiated pay rose 5.4 per cent from a year ago, the ECB said on Wednesday (Nov 20). That is up from 3.5 per cent in the previous three months and was largely driven by Germany.

    The data come less than four weeks before the ECB’s final policy meeting of the year, with officials tipped to lower the deposit rate for a fourth time. The surge in pay, however, could damp expectations among investors and analysts for a spate of rate reductions in 2025.

    While most officials have signalled that more cuts are likely, particularly as the economy struggles to gain traction, the pace and extent is becoming increasingly controversial.

    Some policymakers want rapid moves to underpin activity and avoid an inflation undershoot. Others urge prudence, mainly because of sticky price pressures in the services sector, where wage growth remains strong.

    The ECB forecasts a sharp slowdown in pay increases in 2025 and 2026, helping to return inflation sustainably to the 2 per cent target.

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    In Germany, negotiated wages, including ancillary agreements, rose 8.8 per cent from a year ago in the third quarter – the quickest rate since 1993, the Bundesbank reported on Tuesday.

    But it also said the period may have marked the peak for wage increases, so that pace is unlikely to last.

    Last week’s IG Metall key settlement for the manufacturing sector already locked in relatively moderate pay growth for the next two years.

    While the ECB’s inflation assumption is based on a slowdown in salaries, it also does not want the labour market and advances in pay to moderate too much.

    Chief economist Philip Lane said in October that a more robust jobs market “increases the likelihood of hitting the inflation target rather than being chronically below”, and that “wage increases would be more target-consistent in the coming years” than pre-pandemic. BLOOMBERG

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