The European Central Bank (ECB) and the ‘doves’ of the Governing Council had everything to argue in a simple and forceful way the future battery of rate cuts in the euro zone. Inflation had been moderating for months, the price of oil has fallen sharply in the last year and salaries had begun to moderate. The ‘hawks’ (they defend a more restrictive monetary policy) had run out of claws to try to defend their position against the ‘doves’ (they defend a more expansive monetary policy). However, when this battle seemed over, an impressive figure on negotiated salaries published this Wednesday (this is not the first time that salaries have surprised) challenges the central bank again and threatens to curtail the horizon of aggressive reductions that have been projected for 2025. To date, the ECB has lowered rates three times this year, leading the deposit rate from 4% to 3.25%. The abrasive data published by the ECB this Wednesday does not currently commit a new cut in December.
The growth of negotiated wages in the euro zone has reached 5.42% year-on-year, marking the largest increase since the fourth quarter of 1993. This strong rebound poses a new challenge for the ECB, which until now relied on a sustained slowdown in inflation to justify a possible lower interest rate in the coming months. However, rising labor costs could significantly complicate this roadmap. In anticipation of this, investors have practically erased a rate cut in 2025 in one fell swoop. Looking at the swapsoperators discount a rate of 1.88% for October 2025 compared to the 1.66% they were betting on 24 hours ago. About 22 basis points less, which is close to the 25 of each ‘standard’ decrease or increase of the central bank.
Before the data was known, the economists’ analyzes pointed to Germany, where negotiated wages increased significantly to 8.8% year-on-year in the third quarter from 3.1% year-on-year in the second quarter. Even excluding special payments, salaries increased by 5.6%, indicating substantial increases. Already in previous quarters, German salaries pushed up the global figure for the eurozone, especially due to single payments, salary increases in a single payment – not consolidated – that triggered the index, but would dissipate in the future.
“For the ECB, the most important thing is the outlook for wage growth and therefore previous developments. The German Bundesbank expects future wage negotiations to moderate due to economic weakness and lower inflation. However, the high Current wage growth suggests that services inflation could remain stable in the short termwhich would influence the ECB’s policy decisions amid uncertainties about the pace of slowing wage growth,” Danske Bank points out.
The impact on core inflation
The main problem lies in the impact that these salary increases can have on underlying inflation, which excludes volatile components such as energy and food. Although overall prices have shown signs of slowing in recent months, high wage growth could generate inflationary pressures through two channels: an increase in production costs for companies and greater spending capacity for consumers. Both factors could slow down the disinflation process.
For the ECB, which has an inflation target of 2%, the risk is clear. If wage growth does not moderate, core inflation could remain elevated for longer than expected. This could force the central bank to keep interest rates high for a prolonged period, putting off the expected declines and prolonging high financing costs for companies and households. Christine Lagarde, president of the ECB, has already warned in the past about the risks of second round effectsin which a sustained rise in wages fuels an inflationary spiral.
Salaries generate ‘sticky’ inflation
Furthermore, wage growth could increase the resistance of certain economic sectors to the effects of restrictive monetary policy, such as cooling domestic demand. If consumers see their income increase significantly, it is likely that private consumption will remain strong, making it difficult to control inflation by moderating demand.
This context also generates tensions between the different countries of the euro zone, where economic conditions are diverse. The ‘richer’ countries have tighter labor markets, so they could experience greater inflationary tensions, complicating the ECB’s task of implementing a single monetary policy suitable for all Member States.
The ECB’s dilemma is accentuated because higher salaries also have positive effects. On the one hand, They help mitigate the loss of purchasing power that workers have suffered due to the high inflation of recent years.s. On the other hand, they could stimulate sectors that depend on domestic consumption. However, the balance between these benefits and controlling inflation will be a crucial challenge for the institution in Frankfurt.
In terms of monetary policy, the ECB will need to carefully consider its next steps. Although general inflation is in a process of disinflation, the persistence of core inflation driven by wages could lead the ECB to rule out rate cuts in the short term and even keep open the possibility of further increases if inflationary pressures intensify. .
Dead cat bounce?
Not all analysts view the data with such alarm. Frederik Ducrozet, a Pictet strategist who follows ECB news, considers that this figure is “the economic equivalent of a dead cat bounce.” This concept is used in the stock market world to refer to a small and brief recovery in the price of a falling stock. The expression, originating on Wall Street, derives from the idea that “Even a dead cat bounces if it falls from a great height”. “It is old news, driven by the German bonuses (one-off payments) and which contrasts with the IG Metall salary agreement, the other ECB salary indicators and the growth prospects,” adds Ducrozet.
The salary agreement IG MetallGermany’s largest industrial union, which the analyst refers to has been closed this week. It contemplates a salary increase of 2.0% in 2025 and 3.1% in 2026, plus a single payment of 600 euros in 2025 (compared to 1,400 euros in 2024). The low increase for 2025 reflects lower bargaining power in the German industry. With 3.9 million members, the IG Metall deal sets a key benchmark for other sectors and may also influence the ECB’s December forecasts for wage growth next year, supporting the case for consecutive cuts. of rates in 2025.
Capital Economics is of the same opinion. “While the increase in negotiated wage growth suggests that labor compensation per employee growth will also have increased in the third quarter, the most timely indicators point to a decline in underlying wage pressures. By design, the growth of negotiated wages negotiated wages is a lagging indicatoras it includes all agreements that are currently in force regardless of when they were signed, which means that it does not detect turning points as quickly as the newly agreed wage indicators alone,” explains its analyst Elias Hilmer. The economist considers that the relaxation of the eurozone labor market and lower inflation suggest that workers will demand lower increases of nominal wages in 2025.
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