The ECB's wage mirage

ECB well on the way to further interest rate cuts, ...

The ECB's next interest rate decision is due in the coming week; the central bankers are confident that the inflation rate will return to the target of 2% in the foreseeable future. At the press conference following the monetary policy meeting in December, President Lagarde referred to indicators showing that wage growth will gradually fall to a rate that is compatible with the inflation target of 2% over the course of 2025. It is therefore to be expected that the central bankers will cut interest rates not only in the coming week, but also at subsequent meetings. As a result, the ECB's deposit rate is likely to arrive at 2% by the middle of the year, 100 basis points lower than at present.

... also because its Wage Tracker signals much lower wage pressure

From the ECB's perspective, an important indicator of the impending lower wage growth is the experimental Wage Tracker, which ECB Chief Economist Lane presented for the first time just over two years ago and which the ECB intends to publish on the ECB data portal after every monetary policy meeting from now on. According to this indicator, wages should continue to rise strongly in the first half of this year, but wage growth should slow noticeably in the second half of the year, especially if special payments such as inflation compensation, bonuses or retroactively paid wages are taken into account.

There are some arguments that wage growth is slowing down, ...

In fact, there are some arguments that wage pressure will ease over the course of this year. The unions' negotiating power has deteriorated due to the economic downturn, which has been ongoing for some time. In addition, the argument of “inflation compensation” is no longer as convincing as it was one or two years ago due to the now significantly lower inflation rate.

... but really that strong?

However, it is questionable whether wage growth will weaken as much as the ECB's forward-looking wage trackers indicate. After all, the forward-looking ECB Wage Tracker also indicated a significant slowdown in wage pressure at the beginning of 2024 for the latter part of the year. In fact, wage pressure even increased at that time, meaning that wages ultimately rose by more than one percentage point more on average in the second half of 2024 than the wage tracker had indicated at the start of the year.

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