In Q3, the euro zone's negotiated wage rise picks up speed, adding to the skepticism about rate cuts

Wage growth in the Eurozone accelerated in the third quarter, bolstering arguments for a cautious approach to cutting interest rates, as labor market conditions remain tight despite signs of moderation, according to data released by the European Central Bank (ECB) on Wednesday.

Negotiated wages grew by 5.42% during the third quarter, up from 3.54% in the second quarter, as workers continued to push for compensation to offset income losses caused by the recent surge in inflation.

While the figures may not entirely diminish the likelihood of another ECB rate cut in December, they are expected to fuel debates among policymakers. Hawkish members could use the data to challenge market expectations of rate cuts at every meeting through spring, which currently predict the deposit rate dropping from 3.25% to around 2% or lower by 2025.

On the other hand, some argue that recent wage agreements, not yet reflected in this data, indicate a softer trend. For instance, Germany's IG Metall union recently negotiated a 5.5% pay rise over 25 months for nearly 4 million workers— a relatively restrained outcome that could set a precedent for future negotiations.

Greg Fuzesi, an economist at JPMorgan, noted, "We anticipate a significant slowdown in Euro area pay growth next year as inflation-driven catch-up effects wane. With headline inflation now much lower, nominal wage growth is expected to recalibrate to reduced levels once real wages sufficiently recover."

The ECB has been grappling with the labor market, a persistent challenge in its efforts to manage the historic surge in inflation. Despite sluggish economic growth, unemployment remains at record lows, and firms continue hiring in anticipation of an eventual recovery. This labor hoarding has strengthened unions' bargaining power, with workers striving to restore real wage levels to pre-inflation standards.

While the ECB acknowledges the need for wage recovery, it has urged moderation to prevent excessive pay increases from fueling a self-reinforcing inflationary cycle.

Inflation, however, has declined faster than anticipated, with price growth expected to return to the 2% target by early 2025. Companies have absorbed some wage pressures through reduced profits, and lower energy and import costs have also eased inflationary pressures.

The weakening price dynamics have raised concerns among some policymakers that the ECB could undershoot its inflation target, potentially necessitating ultra-low interest rates in the future.

 

 

 

 

 

 

 

 

 

 

Paraphrasing text from "Reuters" all rights reserved by the original author.