Pick-up in wage growth raises doubts over scale of ECB rate cuts

Eurozone wage growth picked up last month, prompting speculation from economists that the European Central Bank could struggle to cut interest rates as much as investors expect.

A wage tracker by recruitment website Indeed showed salaries for jobs advertised rose 4.2 per cent in the year to June, accelerating to the fastest pace for a year, after hovering around 3.5 per cent since the start of 2024.

“These data may well turn out to challenge the ECB’s inflation forecast,” said Tomasz Wieladek, an economist at investor T Rowe Price.

“If more evidence of persistent wage inflation in forward-looking indicators emerges, the ECB may well have to cut at a slower pace than markets expect.”

The ECB started to cut interest rates last month and investors are now betting on another two reductions in borrowing costs this year, with the next one likely to come in September.

The ECB has regularly referred to the Indeed wage tracker as a forward-looking indicator of where overall pay growth is heading in the single currency bloc, which has become one of the key factors influencing the pace of cuts.

If wages keep rising rapidly, it pushes up costs for companies, which often seek to pass them on to consumers via higher prices, keeping inflation high.

The bank is widely expected to keep rates on hold at its meeting next week, having already lowered its benchmark deposit rate from an all-time high of 4 per cent to 3.75 per cent last month on signs the worst spell of inflation in decades was now over.

Inflation has fallen from a peak of 10.6 per cent in October 2022 to 2.5 per cent in the year to June, but it remains above the ECB’s 2 per cent goal.

Its president Christine Lagarde said last week that it was “still facing several uncertainties regarding future inflation, especially in terms of how the nexus of profits, wages and productivity will evolve and whether the economy will be hit by new supply-side shocks”. 

The ECB’s own tracker of collective wage agreements showed an acceleration in May to 4.2 per cent — up from 4 per cent in recent months, according to data sent by the bank to the Financial Times.

Unemployment in the Eurozone is at a record low of 6.4 per cent and about a quarter of companies in the region are still reporting labour shortages.

Lagarde signalled the ECB was likely to take a gradual approach to future rate cuts by saying “it will take time for us to gather sufficient data to be certain that the risks of above-target inflation have passed”.

The bank last month forecast pay per employee would slow from 5.2 per cent growth last year to 4.8 per cent this year and to 3.5 per cent next year.

Wieladek said he still believed the ECB would cut rates twice more this year, but added that the recent wage data was likely to “lead to significant debate on the governing council”. 

Indeed’s Eurozone wage tracker was lifted by an acceleration of salaries on new jobs advertised in Italy, Spain and the Netherlands, while they slowed in France and were stable in Germany and Ireland.

Consultant Spyros Andreopoulos, a former ECB economist, said tight labour markets meant workers would “continue trying to claw back purchasing power losses suffered in recent years” as a result of inflation.

“This will limit the number of interest rate cuts that are ultimately possible,” he added.

Many European workers have their pay decided by collective bargaining with unions. Because these talks happen only every few years in each sector, wages take time to catch up with inflation, as employees push for their income to keep pace with the cost of living.

Germany’s largest services union Verdi this week threatened strike action that could disrupt trade in North Sea ports after rejecting a pay offer for 11,500 dock workers. The IG Metall industrial union, which represents 3.9mn German electrical and metal workers, has asked for a 7 per cent pay rise.