Euro zone wage growth slowed in the last quarter, a development that supports the possibility of another interest rate cut by the European Central Bank (ECB) in September. The deceleration in wage growth, which dropped to 3.55% in the second quarter from 4.74% in the previous three months, was largely driven by a significant slowdown in Germany, the region’s largest economy, according to data released by the ECB on Thursday.

The ECB has closely monitored wage growth as a critical factor in its monetary policy decisions, emphasizing that a continued slowdown could expedite policy easing. This trend provides a stronger rationale for further rate cuts, particularly after the bank reduced interest rates by 25 basis points in June—a move some viewed as premature.

Despite holding rates steady in July and offering little guidance on its upcoming September 12 decision, the financial markets are betting heavily on another rate cut next month. Analysts predict at least one more cut before the end of the year, citing diminishing price pressures and persistent economic sluggishness across the eurozone.

Olli Rehn, a Finnish member of the ECB’s Governing Council, has already advocated for a rate cut in September, echoing concerns from Germany’s central bank about further delays in the anticipated economic recovery. While some economists and policymakers warn that wage growth might see fluctuations and possibly reaccelerate in Germany, others believe it has peaked and aligns with the ECB’s projections.

“We think that the first quarter has likely been the peak for negotiated wages in the euro area,” noted Morgan Stanley in a recent report. The firm added that the slowdown in compensation growth per employee signals a broader decline in wage momentum, which could provide the ECB with enough confidence to continue easing monetary policy.

Although wage growth remains above the level consistent with the ECB’s 2% inflation target, the bank’s chief economist, Philip Lane, has expressed a relatively calm outlook. Lane has pointed out that wage agreements already in place suggest a further slowdown in the coming quarters. He also noted that wages are still in a phase of catching up after high inflation over the past four years significantly reduced workers’ purchasing power.

As the ECB prepares for its next policy meeting, the latest wage data could play a pivotal role in shaping its decision, potentially leading to more aggressive monetary easing to support the fragile eurozone economy.

(Adapted from IrishTimes.com)

Categories: Economy & Finance, Regulations & Legal, Strategy