Market Analysis

Slowing wage growth in the euro zone raises hopes of an ECB rate decrease

Amos Simanungkalit · 22 Aug34.4K Views

Wage growth in the Eurozone moderated significantly in the last quarter, strengthening the argument for another interest rate cut in September and alleviating concerns that rising labor costs might continue to drive inflation up.

Negotiated wage growth slowed to 3.55% in the second quarter from 4.74% in the previous quarter, largely due to a sharp deceleration in Germany, the Eurozone's largest economy, according to data released by the European Central Bank (ECB) on Thursday.

The ECB has consistently highlighted this metric as crucial for policy decisions and has suggested that a continued slowdown in wage growth could prompt more aggressive policy easing.

The bank reduced interest rates by 25 basis points in June, a move some deemed potentially premature, but maintained its stance in July with no clear indication of its September strategy.

Nevertheless, markets anticipate a greater than 90% likelihood of another rate cut next month and foresee at least one more reduction before the year ends, given easing price pressures and ongoing economic uncertainty.

Economic challenges have led Finnish policymaker Olli Rehn to advocate for a rate cut next month, while the German central bank has projected that the long-awaited economic recovery might be further delayed.

Despite the potential for wage growth to fluctuate and possibly accelerate again in Germany, some economists and policymakers believe it has peaked, aligning with the ECB's projections.

Morgan Stanley noted that "the first quarter likely marked the peak for negotiated wages in the Eurozone." They also indicated that the expected slowdown in compensation per employee signals a decline in wage growth, which they believe provides sufficient evidence for the ECB that wages are moving in the right direction.

Although wage growth remains above the levels needed to achieve a 2% inflation target, ECB Chief Economist Philip Lane has expressed a relatively relaxed view on the matter. He contends that existing wage agreements will likely contribute to a further slowdown in the coming quarters and that wages are still adjusting following the rapid inflation of the past four years, which had eroded workers' purchasing power.